Turnkey rental property investing has appeal. The promise of a good property to go and produce an income from day 1 of purchase. Is it too good to be true? Roofstock even takes it one step further by vetting the properties and property management companies it works with. But is it too good to be true?
Yes, Roofstock is a legitimate company. Investors have used it successfully to both buy and sell rental properties. In 2019, they surpassed 2 Billion Dollars worth of transactions on their platform.
What are the Benefits?
Roofstock helps you filter some of the noise of the market. For example, there are currently more than 1 million homes listed for sale on Zillow in the United States. Filtering through that to find an investment property to buy is a daunting task. Using Roofstock, you can filter investment opportunities by cap rate, return, and their metric for neighborhood quality.
Another benefit of Roofstock is that they sell homes stabilized with tenants in place. If you are purchasing a vacant home, then you have to find a property manager and a tenant. This process could take a few months from purchase. Meanwhile, you are not earning a return on your new investment.
By selling the property stabilized, you also have a better idea of what the market rent is. However, the current rent should still be within the range of what you determine the market rent is using tools such as Rentometer and Zillow.
You do not have to be an accredited investor to buy a property on Roofstock. Many competing services are passive crowdfunding platforms that may or may not require you to be an accredited investor.
What is the Downside?
Investing in single-family homes remotely is inherently risky. There are so many moving parts. A single-family rental home is a complete business with vendors, customers, and lots of capital requirements.
Roofstock is still a fairly new company. At the time of writing, it is over 4 years old. But in the buy-and-hold world, that is not a whole lot of time to establish a track record.
A turnkey property of this type relies on a lot of people. While Roofstock does try to vet and provide good recommendations for these, I have seen both good and bad reports with the end vendors.
Here is a list of people important to your turnkey investment's success:
- Property Inspector
- Title company
- Insurance agent
- Property Management
- Roofstock advisor
An investment in real estate is illiquid. You cannot sell it in just a couple of days. There is a process, and it can take time, especially in a buyers market.
Getting Your Head Around an Out of State Investment
Determining which neighborhoods are good for out-of-state investing can be a challenge. It is hard to get a feel for a property without actually setting foot in it and spending some time driving the neighborhood.
When buying a property remotely, there are a few ways to do due diligence. One way is by hiring a property inspector or contractor to assess the status of the property. Roofstock already inspects the property before they list it, so it might not make sense to do a full inspection, but it is prudent to send someone there independently of Roofstock to verify things.
Another way to gain knowledge about a local market is through a Realtor. Unfortunately, finding a knowledgeable real estate agent from across the country can be challenging. One method is to ask other investors on biggerpockets for recommendations. The agent should help you assess the property and show you other properties that may be similar.
When talking to a real estate agent from out of state, it is important to be upfront that you are looking at a deal on Roofstock since they are not directly making a commission from that sale. However, you can ask what they think of the deal and ask if they have any leads that may be a better investment than the Roofstock deal.
How Big is Roofstock
One way to get better at something is through experience. Roofstock has built up massive amounts of experience through the sheer quantity of transactions handled on their platform. With over 2 billion dollars of transactions. Let's say the average home sold was 200,000. That would be over 10,000 transactions on the platform.
At the time of writing, there are 531 properties listed on the platform for sale.
Roofstock Buying Process
Roofstock defines their buying process as a 3 step process: Find it, lock it, buy it.
- Find It
In the find it phase, you will be filtering through properties on their platform. Roofstock does offer the services of advisors to help you narrow down your criteria. In this phase, you will review the due-diligence documents that Roofstock gathers for each property.
- Lock It
In this phase, you have selected a property and are putting an offer in on it. Once your offer is accepted, you have to pay the marketplace fee of .5%.
- Buy It
To buy the property, you first put your earnest money deposit down, which is $1,500 on Roofstock. Then you work with your financing provider to get the lending sorted out. If you are financing more than 80% of the property, you may have to pay private mortgage insurance. Once the financing is ready to go, then you can close on the property.
Funding your Investment Property
When purchasing a property through Roofstock, you have a few options for funding them. You can purchase them with all cash, you can use your own mortgage lender or use one of their preferred mortgage lenders.
In the world of investment properties, generally speaking, you will be looking at putting a down payment of 20 to 25% of the purchase price.
There are usually local banks that offer a lower down payment option. These lenders usually offer mortgages that are underwritten, similar to commercial loans. They are not hard money lenders, but the rates and terms of these commercial loans are likely to resemble the terms that a bank will give out on commercial real estate.
What Type of Properties can you Buy?
There is a range of property styles listed on Roofstock. While they are all detached single-family homes, there are many differences.
- Age of home
- Size of home
- Characteristics of neighborhood
- Tenant in place or brand new home
With Roofstock, you can purchase new homes directly from the builder. It takes out a bit of the work of going back and forth with different builders to find a property and agree on all the different options. Roofstock has partnered with the builder Lennar properties. In 2017 Lennar was the largest homebuilder in the United States.
Most of the properties on Roofstock are sold, turnkey. That means that the house is occupied, and a property management company is in place to handle the day-to-day management of the home.
Usually, an investor buys a property, handles the renovation, hires a property manager, and leases it up. Then they list it on the Roofstock platform instead of on the traditional real estate market.
Can you Invest in An IRA?
Roofstock works directly with New Direction Trust Company to set up a self-directed IRA that you can transfer or rollover your existing IRA into. This then allows you to purchase real estate investments through your IRA.
There are rules related to investing in real estate through an IRA. Most notably, you cannot benefit from the ownership outside of disbursements when you are in retirement. An example of this would be the IRA paying yourself to be the property manager or to use it as a vacation property.
Technically, you could use a self-directed IRA to purchase real estate that is not through the New Direction Trust Company. Either way, you will ultimately be the one responsible for making sure you are using the IRA in compliance with IRS regulations.
Bring your Property To Roofstock
In Certain markets, you can bring a property you are interested in onto the Roofstock platform. Basically, you can submit a property that is on the MLS to Roofstock to purchase through them.
This service can potentially solve finding an investor-friendly real estate agent that actually adds value for investors.
Roofstock says they offer these benefits to its users:
- 30 Day money-back guarantee
- Lease up Guarantee
- Free inspection of the property
- Use of Roofstock analytics
The process is as follows:
- Send Roofstock prospective property
- Roofstock runs analytics on property
- Roofstock connects you with their affiliated real estate agent
- Agent assists you with
While I have not personally used this service, it sounds like there is potential here for a great value add to using Roofstock as a buyer's agent. Unfortunately, this is in Beta and is only available in select markets.
Passive Investing with Roofstock One
Roofstock One is a platform for making investments passively. With Roofstock One, you can purchase shares of individual houses. Roofstock then does full-service asset management on the property. One benefit of this is that it allows you to diversify in multiple properties.
Can You BRRRR with Roofstock?
The BRRRR method is a strategy many landlords use to grow their portfolios. It allows for forced capital appreciation and cash flow from the same investment. Many investors have used it as a method to get to financial freedom. But can the BRRRR method be implemented with Roofstock? Not really.
It would be hard to implement the BRRRR strategy when using Roofstock. This is because Roofstock is for properties that are stabilized and already producing rental income. Usually, the seller is a flipper themselves and implements a strategy more like: buy, rehab, rent, sell.
That does not mean you can't take a few queues from the BRRRR playbook and implement them into your investments with rootstock. BRRRR works great for investors investing locally where market appreciation may not be as likely, so they rely on forced appreciation that they can directly influence.
When investing with Roofstock, you can choose a market with a high probability of market appreciation. One way to do this is to look for markets with above-average job growth because where jobs are, people will follow. After a few years, when market appreciation is realized, you can then refinance some of the equity out and go onto the repeat cycle.
What Are the Alternatives?
If investing with Roofstock is a bit too hands-on for you, there are other options in the crowdfunding space. These crowdfunding sites allow you to invest in income-producing real estate on a fractional level. In effect, buying shares of real estate properties. Some of the crowdfunding sites are focused on groups or funds of investments, and others allow the investor to pick and choose the investment individually.
Real Estate Investing Crowdfunding Sites:
Another alternative to investing with Roofstock is investing in REITs. A REIT stands for Real Estate Investment Trust. They are modeled after mutual funds. Most REITs are publically traded and highly liquid.
If you are looking to be more hands-on than buying a turnkey property through Roofstock, you can buy a rental property directly.
Roofstock Vs. Stock Market
Investing in a property on Roofstock is has some benefits and downfalls compared to purchasing a publicly traded security on the stock market.
You can compare the cash flow from a rented property purchased on Roofstock to dividends from a share of a company purchased on the stock market.
Roofstock Vs. Investing in a Syndication
A real estate syndication refers to an investment where there is an active participant called the sponsor and limited partners. The sponsor puts together a deal and then pitches it to potential investors.
The benefit for a potential investor, they get access to a specific asset type and a specific investment strategy of the sponsor. They can invest in a piece of the total asset, allowing for participation in larger assets than the investor's portfolio would otherwise allow or providing more diversification than directly investing in the whole asset. Syndications offer their investors passive income.
When investing in a property on Roofstock, you are the asset manager. This makes the investment one step less passive than investing in a syndication where the sponsor is the asset manager. They are the ones making the decisions that the property manager defers to the owner for.
When investing in properties on Roofstock, you have complete control over your portfolio. You decide which cities, exactly which properties, and what investment strategies to execute. In addition, you get to decide how much debt to put on a property and which capital expenditures to make.
Many syndications are funds to invest in multifamily or commercial property. These commercial property investments are too large for most individual investors to purchase, so syndication makes a lot of sense in those scenarios. However, with single-family homes, an individual investor can usually purchase them and diversify enough to provide their portfolio with a level of safety.
One downside of investing in a syndication is that most of them require you to be an accredited investor.
Deciding to invest in a syndication or Roofstock will come down to your individual goals and investing style.
Roofstock Vs. Flipping
House flipping is a popular real estate investment strategy. Probably because of the seemingly low barriers of entry. Even if you cannot qualify for a traditional mortgage, house flippers can often qualify for hard money loans.
The real magic with house flipping is allowing an active investor to force appreciation, much like with the BRRRR method. Most of the inventory on Roofstock is already flipped, so the strategy is much different. You will be looking for passive income properties instead of active income.
Both strategies of investing are viable. However, Roofstock will make more sense to someone who already has a good way of actively making an income and looking for a more diversified income than they currently have.
Roofstock offers a viable platform for investors who want to get into the single-family market remotely. It is an actively managed investment, as you will ultimately be making the decisions regarding the property.
Since the houses come turnkey with property management and a tenant already in place, it can save you some time on the initial setup. Still, the quality of property management and tenants in place will likely vary. So it is important to do vetting of these before making the purchase.