JF2002: The Benefits of Having a 900 Mile Investment Property with Zach Evanish

Zach helps investors locate and identify properties that fit their goals; whether that is cash flow or long term appreciation. He explains how diversifying where your investment property is located can be beneficial. On average his clients have investment properties that are 900 miles from their residence. Zach also gives out some great lessons on what to pay attention to when buying properties. 

Zach Evanish Real Estate Background:

Best Ever Tweet:

“He said “No”. Go Buy a single-family home, start with that and then from there we can talk about duplexes and fourplexes. How do you think I got these 10-15,  50 unit apartment buildings? I started with a Single Family Home.” – Zach Evanish


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Zach Evanish. How you doing, Zach?

Zach Evanish: I’m good, Joe. How are you today?

Joe Fairless: I’m good as well and looking forward to this conversation. A little bit about Zach – he’s the Director of Retail at Roofstock; he’s been with Roofstock since the beginning and has worked in the real estate sector for most of his career. Based in Oakland, California. So with that being said, Zach, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Zach Evanish: Sure, yeah. Like you said, I’ve been in real estate for actually almost two decades now. I got my real estate license in my junior year in college, did my first deal in college, and since then, I’ve done everything from commercial appraisal to multifamily brokerage, to running acquisitions for a real estate fund. Now I’m the Director of Retail Sales at Roofstock, and my team and I are tasked with helping both buyers and sellers achieve their goals through our real estate marketplace.

Joe Fairless: From your previous experience, what experience has helped you best with what you’re doing now at Roofstock?

Zach Evanish: Probably my time running acquisitions for a fund. So this was in 2010, 2011. Just after the crisis, we were buying foreclosures, renovating them and renting them out. We were really the first group to raise private equity with the question of “Can you buy homes in bulk and renovate them at scale?” And then most importantly, can you manage them like a big apartment building?

So I learned a lot of lessons the hard way, but probably the best way just by boots on the ground and buying homes and making the mistakes of maybe buying in the wrong neighborhood or buying a home with small bedrooms and trying to rent it out like a full four-bedroom, two-bath home. So learned a lot of my lessons during that time when I was acquiring all the different foreclosures and short sales, renovating them and then renting them out.

Joe Fairless: Let’s talk about that. So a couple of things you mentioned, buying in the wrong neighborhood. Another is, I think you just said buying small bedrooms. Will you elaborate on that?

Zach Evanish: Yeah, I think sometimes you’ll see, say, a three-bedroom home, and it’s 900 sqft, and you say, “Wow, this looks like a good deal because it’s priced appropriately.” And then when you’re comping it out with the rents, you just need to make sure you’re comping it out with similarly small-sized three-bedroom homes. A bedroom is not necessarily just any room with a closet. A lot of these older 1950s, 1960s homes will have some really small rooms that are basically just big closets, and if your target renter is this family, maybe it’s okay, but tough to fit too many people into those small bedrooms. So just make sure you’re comping it appropriately.

Joe Fairless: Okay, what are some other mistakes or lessons that were learned throughout the process of running acquisitions for the fund?

Zach Evanish: Yeah, some other mistakes – buying near a large industrial facility or buying near railroad tracks or going to a neighborhood at 10:00 a.m. in the morning and thinking, “Wow, this is a great neighborhood. It’s quiet, it’s peaceful,” but without coming back on the weekend or at night to also see what that neighborhood is like. So making sure you’re really getting a full 365 view of a neighborhood you’re buying in. And if you are buying a home near an industrial facility or across the street from a gas station, again, just making sure you’re factoring that in and using other comparables that are in similar situations.

Joe Fairless: When you’re buying in bulk, as I imagine you were buying, what, thousands of homes in certain transactions…?

Zach Evanish: Yeah, I think we bought at least several hundred home tapes from the banks back in 2011, 2012.

Joe Fairless: Right. So when you mention the 10:00 a.m. tour of the neighborhood, I doubt you or team members– and maybe I’m wrong, but I doubt you all were going to tour each of the homes to make sure that the neighborhood was good. Is that accurate?

Zach Evanish: Yeah, it is accurate. We try to do our very best to understand what we were buying. But at that time, it was just difficult when you’re buying that many in scale.

Joe Fairless: So how do you mitigate as much risk as possible knowing that, since you’re buying in so much bulk, it’s just virtually impossible to go do individual tours of neighborhoods on the night and the weekends?

Zach Evanish: Yeah… At Roofstock, we have our data science team that is constantly pulling very granular neighborhood data. I think a lot of that wasn’t around even five or six years ago. So I think using a combination of data to look at school scores, crime ratings, that type of thing, but also having boots on the ground, whether it’s a local real estate agent, contractor, and then in the Roofstock case, most importantly, relying on third-party property managers who can really give you a feel for desirability of that property as a renter.

Joe Fairless: I know this is especially a challenge for investors who are out of state. My first investment properties– actually, every property I’ve purchased as a rental property has been in a city that I wasn’t living in at the time. So that’s even more important for remote investors. Are you seeing more investors buying rentals remotely versus when you first started with Roofstock?

Zach Evanish: At Roofstock, that’s been the theme all around. Really, our goal is to democratize real estate investing, and one of the things that were challenging when building this company is, it doesn’t necessarily make sense for people to only invest in their backyard. One, because if you live in San Francisco or L.A. or Seattle, you’re just not getting any return on your investment if you’re investing locally, but also you want some diversification. I live in San Francisco, but work in Oakland. So my primary residence, my job is all strongly correlated to tech, so it’s nice to invest in places like Cincinnati and Cleveland in Atlanta, which maybe aren’t as strongly correlated, so it’s a nice diversification. So I think throughout we’ve seen people buying homes — on average, I think it’s about 900 miles away from their primary residence.

Joe Fairless: On average?

Zach Evanish: Yes.

Joe Fairless: Okay, that’s interesting. What other trends are you seeing in the real estate market based on your team’s access to the amount of data and the analysis that you all do?

Zach Evanish: Yeah, I see a couple of trends. One, I see a flight to both tertiary markets… So the Austins, Nashvilles, Atlantas of the world, which have been some of the hottest markets over the last five or six years, price appreciation has outpaced rent growth. So you’re not able to get the same type of return cashflow-wise as you were five or six years ago. So there’s definitely a flight towards secondary, tertiary markets, like a Huntsville, Alabama or Augusta, Georgia, places like that.

And then secondly, this is correlated, is just people going more towards the $1,000 to $1,400 home rents, versus either the lower price rents. I think a lot of investors start with lower-priced properties, and then start to see some of the difficulties or management intensiveness of that type of property… Or they’re starting on the higher end properties, either as an accidental landlord or because that’s all they had access to in their higher-priced market. So we’re seeing a lot of people really focus onto those tertiary markets, but also middle of the road, $900 to $1,300 or $1,400 a month rent.

Joe Fairless: What are the pros and cons on each of those three levels that you described – below $1,000, $1,000 to $1,400, and $1,401 and above?

Zach Evanish: Yeah, really good question. So if we start with a lower-priced property, the benefits are the cashflow… You can buy a $60,000, $70,000 home in a Midwest market, say a Cleveland and Milwaukee, and it’s gonna rent for $900 or $1,000. So your cash flow is going to be strong. There’s  generally a high supply of tenants that can afford that type of home.

Some of the downsides are it’s a little tougher to raise rents, because the neighborhood you’re buying in has a higher percentage of renters. So if you want to raise rents, one, your tenant is pretty price-sensitive and maybe can’t afford higher rents, but also they’re going to look around that neighborhood and see seven other vacancies and go to one of those. It’s a little harder to raise rents.

In that mid-tier, say $1,000 to $1,400, these are kind of a total return property, while the prior one was a cash flow property. So total return – I think it’s great because you, again, have a pretty large tenant base. The properties are more in the $80,000 to $120,000, $140,000 range. Some of the downsides are – still a little bit older inventory and you’re probably not going to see a ton of appreciation; obviously, that varies by market.

And then the higher-end homes, when say, we get to $1,400 above– but really when you get to $1,800 or $2,000, there’s fewer renters, so a home can stay vacant a little bit longer. But generally, those tenants are a higher likelihood to go buy their primary residence. So that’s some negatives there, but some positives is you’re going to see generally higher appreciation because these are going to be in more owner-occupied neighborhoods, where you generally see strong school scores, really quality neighborhoods, quality amenities, and generally higher appreciation.

Joe Fairless: What if someone says, “I want cashflow with a good total return, plus I want a property that will appreciate over time”?

Zach Evanish: I want it all.

Joe Fairless:  I want it all, baby.

Zach Evanish: Yes, as we all do… Generally, what we ask is, “What is your primary objective and how long is your time horizon?” My parents have bought some properties through Roofstock using their retirement funds. So cashflow is a big objective for them. They’re looking to replace an income, so they’re focused more on the cash flow properties. Some of our younger investors, we have people who are 23, 24, who make great incomes in San Francisco, who are buying investment properties – they have a very long-term time horizon, so I think they can buy those lower cash flow, higher appreciation properties that generally are just going to barely break even with 20% or 25% down.

Joe Fairless: What’s been some challenges that you’ve had in your position at Roofstock in terms of just either the objectives that you’re looking to accomplish, you came across a couple of challenges. or maybe the type of deals that you all come across, maybe inventories lowered? What are a couple of challenges?

Zach Evanish: Yeah, I think similar to what a lot of investors are experiencing is just a supply-constrained real estate investor market right now. Part of that is just an uptick in owner-occupied market with interest rates being low. It’s just harder and harder to find quality cash-flowing inventory, which is again why we’re starting in to go to some of these secondary and tertiary Sharing markets. So I’d say our biggest pain point is just finding quality supply.

Generally, marketplaces are tough, because you’re always balancing supply and demand, and we want to make sure, as a curated marketplace, investors can buy with confidence, and a big part of that is making sure we have quality supply, that’s been rehabbed professionally, with tenants that have been underwritten correctly… Because again, these investors are buying generally sight unseen from thousands of miles away, and so we really want to make sure they’re buying a quality product.

Joe Fairless: When you’re talking about markets like Huntsville, Alabama, and Augusta, Georgia, what are the metrics that you all look at in order to qualify a market that puts it in that type of category versus a category like Austin, Texas or Nashville?

Zach Evanish: We really try to look at, as you had mentioned earlier, different investor types – someone who’s focused on cash flow, total return or an appreciation investor. We want investors — as soon as they register on our site, we ask them some questions, we hop on a call with them and really help them come up with their hypothesis based on their goals, their time horizon, and hopefully help them fall into one of those buckets. And then once they’ve picked out their strategy, then we can help them connect with a market.

Our data science team looks at things like net move-ins, job growth, overall market appreciation, rent growth, and then we look for pockets of neighborhoods where we say, “Hey, these still have solid crime scores and school scores, but also still offer quality cashflow.” We don’t want to help necessarily Californian investors buy overpriced properties in the Midwest. So we do a lot of diligence on the frontend to make sure people are buying quality properties, that are priced appropriately.

Joe Fairless: When you’re looking at crime and school scores, are they relative to that market or to the US?

Zach Evanish: We have a neighborhood rating, which is a proprietary system at Roofstock. Every property has a rating between one and five stars, and that has five different components, and we get down to the zip code plus two level. So that neighborhood rating will be for a subset of 500 homes. So we get pretty granular with that rating.

Joe Fairless: What do you mean zip code plus two?

Zach Evanish: So generally, a zip code has five digits. But if you get to a zip code plus two level, it’s just a way of looking at the city from a very granular level, and that’s generally every 500 homes will fall into that.

Joe Fairless: Oh, okay. Here’s a little factoid I didn’t know. I always wonder what those extra numbers were after my five number zip code.

Zach Evanish: I asked the same thing. My much smarter data science team was explaining it to the sales guy.

Joe Fairless: Did they roll their eyes?

Zach Evanish: Yes, they did.

Joe Fairless: Oh, damn that. They shouldn’t; that’s a legitimate question. Based on your experience, what’s your best real estate investing advice ever?

Zach Evanish: Wow, great question. The best advice ever – get started sooner. My real estate mentor was actually a client of mine when I was about 27, selling apartment buildings. I was actually selling one of his buildings and he said, “What are you going to do with this commission check?” And I was talking to him about cars and boats and ridiculous things, and he said, “No. Go buy a single-family home. Start with that, and then from there, we can talk about duplexes and fourplexes and– how do you think I got these 10 to 15 different 50-unit apartment buildings? I started with a single-family home.” So him giving me that look and kicking the butt of, “No, you’re not going to go buy those things. You’re going to go buy a single-family home and then we’re going to help you build your real estate portfolio.”

Joe Fairless: Did you?

Zach Evanish: I don’t think I did.

Joe Fairless: You didn’t…? [laughs]

Zach Evanish: No, I did probably—

Joe Fairless: Did you get a boat?

Zach Evanish: No. No boat, but I don’t think I listened to that advice. I think I probably went back to him six months later after more handholding from him and bought my first investment property. It takes me a couple of times hearing something before it sinks in, Joe.

Joe Fairless: Hey, when the student is ready, the teacher will appear.

Zach Evanish: Exactly, right.

Joe Fairless: What was that first property?

Zach Evanish: It was a single-family home in Northern California, in an area called Pittsburgh, just Contra Costa County of Northern California. I think I probably paid $130,000, $140,000. I think it rented for $1,000 or so.

Joe Fairless: Do you still own it?

Zach Evanish:  I do not. I’ve exchanged that one into a 4-plex that I now own in the Bay Area.

Joe Fairless: Nice. What did you sell that one for? Do you remember?

Zach Evanish: I don’t–

Joe Fairless: You don’t remember what you sold your first house for?

Zach Evanish: I don’t remember. I want to say it was $310,000, $350,000, something like that.

Joe Fairless: Okay. And then you exchanged that into a 4-plex?

Zach Evanish: Correct.

Joe Fairless: Cool. And you still own the 4-plex?

Zach Evanish: I do.

Joe Fairless: What are your plans for that?

Zach Evanish: It’s in a really good location in Oakland, so I plan on probably holding that for quite a while. Oakland’s one of those markets that’s just been on fire lately. Potentially even a condo conversion play, I might able to sell those units off individually. The location is just so prime that I feel like the longer I hold it, it’s just getting better and better.

Joe Fairless: You’re going to do a cash-out refi?

Zach Evanish: I don’t think so. I love paying down the mortgage and have very little debt on it right now. Most of my properties, I just continue to pay down.

Joe Fairless: So you touched on your philosophy there, but will you just elaborate a little bit more? I’d love to hear your thoughts, because there’s two schools of thoughts – you cash out, refinance, get the cashback, and then you got little or no money in the property, you don’t cash-flow nearly as much; it’s not as safe, it’s more aggressive, but you can then take that money and go buy more property… Versus your approach, which is opposite. Will you just elaborate more on why you do that?

Zach Evanish: Yeah. I have done the cashout refi, the BRRRR strategy on a couple of properties that I bought at a discount and bought them all cash, and was able to pull that cash out. So if it’s a property I buy with that strategy, I will do that. But what I don’t do is every five or ten years go to the piggy bank and refinance that property.

I do look at my strategy for that particular property and I have cashflow goals that I’m looking to achieve. When I’ve run the numbers for most of my properties, it’s just made more sense to hold on to them long-term.

So yeah, I guess that’s my strategy – if during acquisition I know this is a property that I’m buying at a discount, but in order to get that deal, I need to buy it cash or go hard money or partner with someone, then as part of that acquisition strategy I may do a refi after getting a tenant out or making repairs. But generally, my strategy is to hold on for the long term on the properties.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever lightning round?

Zach Evanish: Yeah, let’s do it.

 

Break [00:18:48]:03] to [00:19:42]:07]

 

Joe Fairless: Best ever resource you go to to stay up to date with news about your industry or just to stay sharp professionally?

Zach Evanish: John Burns reports for single-family rentals.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Zach Evanish: Not getting a second opinion on a foundation issue.

Joe Fairless: Please elaborate.

Zach Evanish: So I bought a property which it looked like there were cracks, and I had two differing opinions. One inspector said, “No, it’s just settling, you’re fine.” Another one said, “I’m not sure. I think there could be a bigger issue here.” I was under a timeline, and it was an earlier purchase and got pressured to remove my contingency and move forward, and 30 to 60 days after owning the property I started to see some additional cracks and it turned out there was a pretty significant foundation issue that ended up costing me, I think, $15,000 or so.

Joe Fairless: Best ever deal you’ve done?

Zach Evanish: A deal I bought two years ago in Cleveland. I bought it directly from a property manager and they had a tenant who was on  Section 8, and very motivated seller because of this tenant who hadn’t paid rent. I was able to meet with the tenant, figure out a payment plan and then work with them, and also get that home rehabbed. I bought it for probably, 55% or so of market value.

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

Zach Evanish: A couple of ways – Habitat for Humanity and also First Tee. I’m a big golfer, so I’m a coach for The First Tee program.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Zach Evanish: They can email me directly, zach@roofstock.com. Before that, just go to Roofstock, it’s free to register. You’ll see all our different investment properties. We also have a product for accredited investors, new investors, we have a new real estate academy. So really, no matter where you’re at in the real estate journey, we have something for you.

Joe Fairless: Thanks so much for talking about some trends that you’re seeing, talking about the different types of objectives that investors have, and how you walk investors through the thought process for what makes the most sense based on those objectives and type of property. So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Zach Evanish: Sounds good. Thanks a lot, Joe. I appreciate it.

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Best Real Estate Investing Advice Ever Show Podcast

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!

Best Ever Tweet:

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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no fluff real estate advice

JF701: How to Buy a 4 Plex in CALI with LITTLE and NETWORK Your Way to Financial Freedom

Find it difficult to get your foot in the door? Today’s guest did all he could to squeeze himself into a four Plex FHA deal, and he did it! It wasn’t great at first, but he worked at it, and in the end he grew the largest real estate meet up in San Francisco! Hear how he networked his way to wealth!

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J.Martin Real Estate Background:

– Founder of the San Francisco Bay Real Estate Networking Summit
– $1,000,000+ in high cashflow real estate
– Based in Oakland, CA
– Say hi to him sfbaysummit.com
– Best Ever Book: Rich Dad, Poor Dad by Robert Kiyosaki

Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com

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We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more at http://www.fundthatflip.com/bestever.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
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Best Ever Show Real Estate Advice

JF80: Get Out When the Gettin is Good

Today’s Best Ever guest talks about the importance of gettin’ out when the gettin’ is good.

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 Jay Hinrichs’s background:

–        Bought a mansion from an NBA star on a short sale and made close to $2,000,000 on it

–        Has done more than 3,000 transactions

–        Formerly president of a mortgage company in Oakland, CA that pooled 35MM of assets across over  250 investors

–        Say hi to him via phone at 503.789.2451

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Joe Fairless