Roofstock's Gary Beasley on the Top Trends in Real Estate Investing

Welcome to the Top of Mind podcast from Altos Research. This is the show where we talk to real estate industry insiders and experts about the trends shaping the market today. Enjoy the show.

(00:19)
Mike Simonson here. Thanks for joining me today. Welcome to the Top of Mind podcast. For three years now, we've been sharing the latest market data. Every week in our weekly Altos Research video series with the Top of Mind podcast, we are looking to add some context to the discussion about what's happening in the market from leaders in the industry. Altos research tracks every home for sale in the country every week, all the pricing, all the supply and demand, all the changes in that data. And we make it available to you before you see it in the traditional channels. People desperately need to know what's happening in the housing market right now. The market was frozen so solid last fall, and now surprisingly, the landscape is, is changing. So if you need to communicate about this market to your clients, your buyers and sellers, go to altos research.com and, and just book a free consult with our team.

(01:15)
We'll review your local market and how you can use market data in your business with your buyers and sellers. Okay, let's get to this show. I have a terrific guest today, Gary Beasley. Gary is the CEO, co-founder of Roofstock, whose platform lets everyone from first time investors to global asset managers evaluate, purchase and own residential investment properties. Gary is a true pioneer in real estate technology, and he's one of the few people who has a longer history in this industry than I do. The track record though includes both Zip Realty and Starwood Waypoint through IPOs to the IPOs. Gary also served as CEO O of Jor Aviv Hospitality, the second largest boutique hotel management company in the country. Gary was named Top 50 FinTech CEO and has been named to housing wires HW Vanguard. So Gary, welcome to the show.

Good to be here. Mike,

I really appreciate the time today. And you know, this is, this is great because we talk about the market, we talk about, you know, the, where things are going in the market, and Roofstock as a as an investment platform has a really unique position. So I'm interested in hearing, you know, a lot about Roofstock and what you see through it, but before we dive into all of the Roofstock things, I mentioned a little bit of the, the tenure in real estate technology. Tell me about that journey. Let's start there.

Yeah, well, Mike, I don't know if you remember the first time we met, but I, I think it was about 20 years ago when I was at Zip Realty and you were in our offices.

It might, yes. It, wow. It might have been, I was

Just thinking about that a few minutes ago as we were getting on this call. But yeah, so we were both, both early looking at housing and so I, I guess I would just say that I've spent a lot of my career at the intersection of technology and real estate, and I've, I've had a focus on operationally intensive real estate, hospitality, single family rentals, where it's a kind of a combination of a real estate investment and an operating business. And because I think you can apply technology to a lot of those models and get some real leverage and it's all also areas where innovation can really pay off. So I like to innovate and is Mike mentioned I was early in the single family rental space, so with some, some friends and I, we started buying homes during the downturn and the prior downturn, the great financial crisis.

(03:45)
In about 2008, 2009, we started buying HO Homes with our own money friends and family money. We raised some funds and eventually some institutional capital formed Waypoint Homes. We were, I believe, the first platform to get to a thousand rental homes that we owned and managed. And that was in January. I remember it because it was in January of 2012. It was in the Wall Street Journal. this co this company's got a thousand homes, and then by the end of that quarter invitation Homes, which was Blackstone, was buying a thousand homes a week. That was the beginning of the institutionalization. It took us, you know, four years to get to that thousand that we scraped together. And then it was, so those were really interesting times, and if you'll look, Mike's a data guy. Prices declined for five years and in the first quarter of 2012 is when home prices started to tick up again.

(04:41)
And that was really when all the institutional capital started to flow in and effectively provided a floor. It did provide a floor for the housing market, and then it was, you know, off to the races from there. And so we built a reit, you know, we, we took several thousand of these homes and put it in a vehicle went public, and I was running that as a, as a c e o of that business and then left about 2015 to form Roofstock with the idea that, wow, this is pretty, this, this industry is going to continue to mature. We can talk about some of the characteristics of it if you're interested, but it's, it's a massive industry and didn't really have infrastructure for investors to, to buy, sell and manage more efficiently. So that's what we built. I like to describe Roofstock really as kind of like we're providing real estate investment as a service for investors.

(05:29)
So you could plug into us just like, you know, AWS or Amazon, you know, or any other cloud service. Salesforce, rent our platform and put money to work and we'll help you buy, sell or manage. And then when you're done, you could unplug and, and no harm, no file, but it, it's a way that we could offer the best sort of tools, technology, data team insights to, to investors out there who don't need to necessarily be ex experts on their own or, or build their own infrastructure. You can sort of rent ours. And so that's the basic business model. You know, we've been around for about eight years now. we've done, you know, close to 6 billion of transactions, I guess through the platform since we started. we manage about 17,000 houses for investors. so, you know, we're pretty active in the space and we see a lot of, a lot of the trends going on. And, and Mike, I'm a regular fan of your, of your podcast and, you know, your, your regular broadcasts on the market. And it's very interesting cuz I, I try to listen to a lot of these and triangulate around them and to see what trends are. And so it's, it's always useful. Although we're focused on the investor side we are, you know, we're still in housing and so all the trends that are affecting the owner-occupied trades are, are very relevant to what investors are seeing and and vice versa.

Yeah, man, so many things to, to dive into there. One of the things that you mentioned, so I didn't realize at the time, I remember Waypoint starting and, and building Waypoint was one of the few that were, was buying homes before the turn was obvious, you know, in the Alto state. So it, the, the, the housing market bottom that the, the common, the conventional date is January of 2012 in the Altos data. We could see a turn in the first quarter of 2011. and it was the fir of our lead with our leading indicators in that we could, we could start to see the data turn there. And and one of the things that and maybe we'll put a pin in this for later in the conversation, but one of the things I'm interested in is, is how investors can be countercyclical. And because I watched so much of the money be procyclical, we watch the IBU who are buying right up until the, the prices were, you know, the demand fell out and then, then they stopped and they haven't started yet again. Even so,

It, it takes a lot of conviction to be counter cycl cyclical or, you know, a lot of people like to say they're contrarian. They're only contrarian when they're other people being contrarian and then they're following those contrarians. So it, it's really hard to be a thought leader. And I remember in the early days we were buying these homes in the, in the kind, kind of far East Bay, Pittsburgh, Antioch, Lejo, places like that, that back in the peak were say $400,000 and we're buying 'em for about $125,000. Whoa. Yeah, we were putting in 25 grand and we were getting a 10% net yield. And we were saying, what's wrong with this? What's wrong with this picture? The only thing we could find wrong with it was we weren't buying enough houses. I mean, that was literally it. We were like, is everyone else? Are we crazy or is everyone else not seeing the obvious?

(08:59)
Because we said we know we're buying houses that will recover at some point, they're generating incredible cash yields, by the way, no one can buy a house anymore. So everyone's renting, so at waiting lists for these houses to rent. no one had the capital to renovate them and make them livable. So we're buying all these homes and making them nice. The neighbors loved us. It was this virtuous cycle, right? And there was no financing available. The, the, there was no debt financing. It had to be in a, you know, house by house or full recourse basis for their banks wouldn't lend more than 50% on those rental homes at $125,000, $150,000 value when they were lending 97% when they were worth 400. That's how crazy it was. Right. And, and so, you know, we, we just knew that was a good trade. We didn't know if we could create a company out of it.

(09:48)
but we thought it's possible and if we could figure out how to manage these at scale, and we applied a lot of technology and business process automation, things like that back then for the underwriting and the management. And we were able to make a platform out of it. And we were one of the early folks to kind of scale a scattered site management operation. Then it was just for our own account. You know, since then a lot of companies have done that, and now we're sort of doing the same thing at Roofstock. We've kind of rebuilt on on newer technology, but we're offering it for third parties to use it instead of just, you know, for our own cup.

Yeah, that's that's quite a journey and wow, what what a what a bunch of learnings in there and, and you know, I think it was not at all clear that you could do single family management at scale in a diverse environment compared to a concentrated real estate, you know, a concentrated apartment complex. And so that was a, that was a, a risk you took.

It was a risk we took, and I can't tell you how many times at conferences in the early days, people just thought we were crazy. There's no way you could manage these things efficiently. No way. And it was the apartment folks in particular who couldn't get their heads around a, it's hard enough to manage an apartment building, but there are actually some advantages to the scattered site, I think a as you know, but you don't have any common area expenses like you have in apartments, which is kind of a nice thing. so you don't have pools and utilities and things like that that you have to maintain and pay for. That's kind of a big deal. And then your turnover's about half as much as in apartments, so costs you a little bit more when someone moves out, but it's a stickier resident. They tend to stay three or four years. And when you work through all those, you know, the math, it, it turns out that the, the operating margins are quite similar to apartments.

That's great. before we move off of your, your history and and into the future let's talk about zip Realty for just a quick sec. So zip was the original internet based real estate brokerage, and I can imagine the pitch deck at the time, you know, that was as I like to say, two bubbles ago, right? And and maybe now we call it three bubbles ago <laugh>. So what did you learn at zip that you've brought forward?

Yeah, so I learned at zip that first of all people craved information and data. And so we, we were really, I think the first to put complete multi m mls data online. And there were, there was a lot of controversy about that and how it should be done. you know, the National Association of Realtors didn't like it very much, and

This was like 1998 maybe. Yeah,

Late nineties. Late nineties. And there's a whole bunch of stuff that's happened around that. We do a whole show on that, but at the end of the day, we were allowed to do it. We sort of were pioneers in what's called the virtual office website construct. So the idea that someone should be able to sit on their computer and see a listing as opposed to being handed a cut sheet in someone's office, it's impossible for people who didn't live through that to think that that was actually the case. But it used to be the case information then creates, when, when people have more information, they have more power. So we empowered consumers. We had a discount commission structure, we actually had a rebate on to the buy side. We rebated a portion of our commission to our buy our clients. People like the service.

(13:14)
The website was awesome. we had a similar issue with Redfin though, and then a lot of people use Redfin's website, but they don't use their agents. It just happens to be a phenomenal search tool. And then they'll use their, their neighbor to represent 'em and they say, thank you very much red. We had a lot of that that happened, but that was okay. We, we, you know, we were, we were building a brand. we had over 2000 agents when I left. We were profitable. we were public and as you mentioned, we took the company public we're purchased by Realogy ultimately. So it kind of got subsumed by Realogy. The brand sort of went away and they used some of the technology, but, but it, it ceased to exist as a standalone brokerage. But I learned a, you know, there's a lot of, there's a lot of information out there on the resi side that wasn't put to use.

(14:03)
I also learned it's kind of hard to reform an industry from within as opposed to coming at it with a totally different model. Cuz we were, you know, we were participating in the real estate space with a discount commission structure that people frankly didn't love because people kinda like their commissions the way they are. Thank you very much. And as opposed to at Roofstock what we've done is we really sort of created our own marketplace. So you know, so we've sort of, how do we bring buyers and sellers together directly how do, how do we work with investors to, you know, build their own portfolios? And we do work with agents and brokers all over the place, but, but it's, we had to come at it with a very fresh mindset of how to build a business that wasn't necessarily just looking through the mold of an existing construct and then tweak it around the edges. It was really, let's start with a whiteboard and say, okay, if we're gonna build sort of a customer focused, customer centric model for investors, how would we build it? And that's, that's where we started.

That is great. And so that's a great segue to talking a little bit more about Roofstock. So Roofstock is a marketplace. You have sellers and buyers and marketplaces are awesome when they work. They're notoriously hard to jumpstart. You can't have the ghost town, you get buyers in there, but there's no sellers and you can't have sellers with no demand. So, so what, tell me about that. How did you jumpstart it?

Yeah, it's a great observation. I, I was at a conference early on and somebody said marketplaces are so valuable, but they're so hard to start, but they're even harder to kill once you actually get 'em going, <laugh>, because they can get those network effects. So I knew that I could get supply from a lot of the single family rental owners because there was no efficient way to sell houses with tenants in them. Back then, when we were selling homes from Waypoint from some of our early funds, the only way we could do it was to vacate it and sell it through the mls. And there was a lot of leakage in terms of cost, not only for the commissions, but lost rent and CapEx to prepare it for MLS sale. So it still worked because the properties had appreciated so much, but we thought, well, gee, wouldn't it be great if we could sell the home with a tenant in place for a couple percent, not have to vacate it.

(16:24)
you don't have to wait for the tenant to move out. You don't have all that friction. And we match and we know there's buyers who would value the tendency, whereas opposed to that tenant being a liability, the tenant was part of an asset. So I went to all the CEOs of the different companies, I said, Hey I'm gonna start this marketplace. I need you to give me, you know, 20 houses to sell and I'm gonna put 'em up and see if we could attract buyers. And that's how we got the first hundred listings just from, because I said, listen, if it works, I'm gonna be in a great outlet for you to be able to get some liquidity without having to vacate the homes, and I'm gonna be really cheap and I'm gonna have scale and drive it down. So selfishly, they, you know, I said, it's, it's in your best interest.

(17:05)
It's in my best interest too, cuz I need supply then had to go bu build a, a website and a, in a process for buying home site unseen. No one had ever sold $200,000 items online before that you don't see, right? No one's ever heard of Roofstock, you're in Seattle, you're buying a home in Orlando through some site. How do you build trust? And, and so one of our investors in the very early days said, you know, to build a a marketplace, the first thing you needed to do is build trust. So think about this was Mark Benioff actually think about what you can do to build trust. And we came up with this idea of a 30 day money back guarantee. So we did that. So you could buy a house and, and if you didn't like for any reason in 30 days, we would essentially give you your money back.

(17:53)
We'd buy it back for what you paid, and then we would resell it and we would keep any profit or loss based on that. It seemed kind of crazy, but very few people took us up on it. But once we did that, people said, okay, it's like when you buy that airplane ticket and it's cancelable for a day. So we did that. We got the marketplace going, we started to build liquidity. What we realized was in the early days that marketplace was really interesting and useful, but we were, it, we were leaving a lot on the table by it being one and done. So investors would buy a home through us and then we'd pair them with a local property manager and we're done with a relationship essentially. And what we realized was we wanted to stay connected to the clients long term. So we bought a property management company called Street Lane Homes, and we kind of upgraded all the tech, integrated it in with Roofstock.

(18:44)
And so now we have a full stack model where we, we can own the property management going forward as well. So then we have an ongoing relationship with the owners. We have, we can develop relationships with the residents in the homes. We collect all the data post sale so we can monitor the performance and that helps us with our, our underwriting engine. so there's a lot of reasons to, to build this full-stack platform. And so that's why I think we've really migrated, I think you correctly noted that we really started as a marketplace, but we've sort of, the, the model has sort of expanded, if you will, into this kind of real estate as a full real estate, as a service platform where the transactions are part of it, the buy side and the sell side transactions happen within this ecosystem, but we also have a big management business, both property and asset management and a lot of data being analyzed.

Yeah. Okay. So before we get into the data, the, the observation, the interesting observation is there is that, you know, there have been a lot of people, and I know there's, because over the years they call me and they say, Hey, I'm building an investor website where they can buy properties. And you know, there've been a lot of people with that vision, but very few of them had like, it was like, only Gary could do this because Gary came outta Waypoint and had actually had the, the ability to, to fill the supply as you go out the door.

It was a huge advantage, Mike, I mean, knowing, so one, having those relationships helped, but I think as important, if not more, was understanding how the industry worked. And so when we were raising capital for, for the business, the fact that it's a huge addressable market is, is important and critical. the fact that we were an experienced founding team was really important and critical, but I would say the industry knowledge piece of how does this work, understanding investor pain points, having the, you know, looking at things through an investor lens and then building tools to address we knew were pain points was probably the most important part of, of getting our capital raised. And, and you know, there's a lot of people who could build a great website and, and put, put together a, a great kind of PowerPoint deck, but to actually execute on it is hard.

(21:04)
And if you come at something without any industry knowledge, the the advantage is blank slate. You don't, you're not constrained by the way things are done. But I think that if you can know how things are done and still whiteboard it and say, I'm not constrained by the way things, but I know how they think, I know what the issues are, I understand the regulatory environment, I understand how what the constraints are. That's a huge enabler and it really, I think some of the more successful founders have enough of that industry knowledge and enough of the ability to, to look beyond the way things are done and combine them together.

Yeah, that's a real skill to know the rules well enough to choose which ones you're gonna break

<laugh>. Well

Said. Yeah, that's great. Okay, so you mentioned data and the data that you have and the data that you're learning. Let's talk about the unique view. What do you like have on the real estate market or maybe for investors in the returns? Like what do you, what what does Roofstock know that the rest of the world doesn't or should know or is maybe getting wrong?

Yeah. Well, I don't know if there's an easy answer to that. You know, as you know real estate is inherently local and so it's hard to generalize about what's going on with the real estate market, which is one of the reasons I think your research is so useful the way you, you go into different markets. But, but generally I think we can see trends kind of like you, you pointed out, Mike, that you did back in the 2011 maybe a little bit earlier. because we see what's happening with investor activity, we, we see investor buy boxes, for example, on a buy box would be, we've got an investor who says, I wanna buy a property of this, this kind of yield in this type of market. we see how adjuster investors are adjusting their buy boxes in real time, for example.

Okay, that's a great one. So, so tell me how, can you tell me a little bit about how that buy box changed last year, beginning and end of last year and what it's looking like now?

So I would say here, take a market like Phoenix is a good one because it's a, a lot of investor act, just a lot of activity in general. So it's a little bit of a nice sort of microcosm, you know, if you, if you go back to you know, late 21, early 22, things are blowing and going. you know, so kind of first quarter of of 22 investors were buying let's call it homes in Phoenix, a $250,000 home in Phoenix that's sort of a 4% cap rate capitalization rates. So that unlevered yield of 4%, they were able to borrow at 3% or less through warehouse lines or securitization. So there was meaningful, what we call positive leverage in, in that equation. as rates started to go up, investor appetite, especially investors who, who relied heavily on leverage started to become more cautious and they said, Hey, you know what, I need a say a five and a half cap rate because rates are kind of coming up and cresting 5%, you know, and I, I still would like to have a creative leverage.

(24:23)
And so what they were saying is, instead of paying a price that would get me a 4% yield, they would say, well, I need to pay 20% less. and, you know, however the math would work. And and so, so what what that did is it created, you know, houses were go, they might have gone from two 50 up to 300 and then all of a sudden they came back and, and then rents continued to go up and then prices started to come down at least from, you know, with rates going up and investors needing a higher yield. So it actually brought prices down to where they were before and in some cases a bit below. but rents have not necessarily come down. Rents have been stickier in a lot of those places now. There's more homes for rent now than there were.

(25:07)
And we could talk about the implications of interest rates on renter demand, which I also think is interesting. It's also a positive, I think, for the single family space longer term. But but, but you know, we could see pretty early on what was happening as rates were ticking up and how cap rate expectations were going up, that that was quickly gonna turn into investors not being very active. If rates continued to go up in Chairman Powell's vision was being, you know was working itself through, we knew at some point in 2022 things were gonna grind to a halt which they did which they did. Now Phoenix is a really interesting example and you know, again, things tend to happen a lot quicker today than they used to a decade ago. We're already seeing Phoenix sort of start to recover again.

(25:58)
So, you know, and I think you've probably seen it in some of your data but depends on the neighborhood and the price point, but areas where there was very weak demand, we're now starting to see sort of some capitulation where sellers are, are, are are selling. There's a lot of, there's a, there's a shortage of inventory as which, which is prop, which, which prevented prices from dropping very much. And then you have buyers who are somewhat fearful of rates going back up again knowing they could always refinance. So they're pulling the trigger. And then you've got investor buyers who think, you know, the price has gotten low enough to where over the long term, I still feel really good about the long term growth prospects in this market. So, so the correction seems to be happening quicker, not multi years.

(26:47)
Like we saw back in the great recession the great financial crisis, it was like a five year correction where prices kind of went down. and one of the things that I think you pointed out, Mike, and some of your stuff, and I follow the home price data, it's, it's deceiving because year over year it seems like prices are coming down right? Cuz you're looking 12 months ago, but if you look to the prior month, the last couple months they've been ticking up. So it, it, it's, so it depends on how you interpret the data where the, the home prices are going down or they're going up, they're going up month over month down, year over year against very difficult comps.

Yeah, yeah, exactly. And so the buy box now is, are investors saying, so prices went, that property went from two 50 to 300, back to two 50. And are investors now saying, well, I can like I can take a a slightly worse cap rate.

Yeah, there, so, so I would say it depends on the investor. but generally if if prices went down un enough to say, generate a 6% cap rate, then investors would buy everything in still it, like today they'd buy everything and, but today you can't really buy much of the 6%, but it's also not at five either. It's kind of somewhere in between. And so if you see continued rent growth, even if, you know, prices stay flat, the yields go up the way the math works, right? So you, you're not very far from, it's starting to make sense. There are buyers who are starting to buy without leverage, so they're less sensitive to the mortgage rates. Insurance companies for example, or family offices or, or high net worth investors who might pull money outta the stock market and say, you know what? I want to put a little bit more in property because I feel like it's stable. it's, there's some tax advantages to, you know, having it in real estate versus the stock market. I'm worried about volatility in the stock market and I'm just gonna park it in some houses. So we're seeing more of that sort of stuff happening. and then at some point when rates inevitably come down, again, a lot of these investors will put debt on the property

At that point. Okay. And so, so we can see some of the demand in say, Phoenix, which, which obviously recovered and as you pointed out, put a floor on some of the prices. so the demand there would and would be likely less leverage dependent.

The high leverage money, I isn't super active there right now, so I, I'd say there's, there's fewer buyers in the market, less reliant on low cost leverage to justify their, their purchases. But there's also, you know, not a lot of inventory either. So there's, there's more inventory than, than there was a year ago, but a lot less than there was, you know, in, in the past, right? So we're well below that. So you know, I would say there's homes that are appropriately priced are, are trading if, and you know, there's enough demand for the limited supply, I think for things to clear the thing, the real challenge we have right now is with rates where they are, no one wants to give up their 3% mortgage to, to, to sell you know, and to, to move to, for the benefit of taking on another six or 7% mortgage so people are keeping those homes and renting 'em and whatever.

(30:29)
And so that's keeping the supply to either forced sellers, really kind of forced sellers but the, the discretionary sort of move up or move down, buyer sees no incentive to do that right now. And then the other supply issue is new construction and a lot of the, we've got a, a shortage of homes in the United States, and depending on which analyst you talk to, it's a big number. And a lot of the projects that have been planned are now on ice because in this interest rate environment, these projects are not happening. And so it's going to create an, you know, unfortunately I think a shortage of supply over the medium to long term. We were just starting to catch up a little bit and then now I think we're gonna be behind again for all those reasons. It's one of the reasons I'm fairly bullish on housing broadly and single family rental is there's, there's a real, I think, floor on how and more prices can go just because of the supply constraints and there are enough pockets of demand to support those prices. And I think over time increasing prices,

That's a, that is a great synopsis. So you're broadly bullish on the sector over the medium to longer term because of our structural shortage problems. I appreciate that that insight. let's talk about your, your users, your, your, your clients as a real estate investor. How do I look at the market now thinking about risks and opportunities and what should I be thinking about?

So one, one thing about real estate is very hard. Like with anything, it's very hard to call a bottom. And so you know, I encourage people to think about their, their time horizon if they're looking to do a quick flip, I think it's gets a little bit more challenging because it really matters when prices go up. Again, if you're looking to have a longer term strategy of building a portfolio for, you know, some income or some, you know, ultimately appreciation and wealth creation, then I think buying through cycles kind of like the whole dollar cost averaging approach in stocks kind of makes sense to me. you're, yes, prices could go down, kind of like I mentioned we did at Waypoint, we started buying in 2009 and prices still continue to go down for another couple years. We're like, that's okay, it was cheap then.

(33:00)
Yeah, it's cheaper now, but I still have a house that long term is a good value. When I think about where the fair value is, I guess I would encourage people to, to think about it more as a longer term journey. there's much less competition now in, in terms of absolute number of buyers with the big institutional players not active right now. I think it's good opportunity for others to buy and it's not as if the big institutional guys are buying everything, cuz it still is a very small piece of the overall bucket. But if you have fewer people out there buying because interest rates are higher and you're willing to stomach it, then I think it's interesting. I think one interesting strategy is to either, you know, just buy and then say I'm gonna refinance in a couple years and that's good.

(33:45)
You can also buy down your mortgage, you know, pay a few points up front and get a lower interest rate. And that's what, what some people are doing today. so you know, you could buy your mortgage down into the force, he pays some money up front and you're like, okay, and I'm just using that as a negotiating ploy with my seller and I'm just getting that. I'm asking for this discount off the list price and if you could get to this price, I'll buy it. And then you're locked in at a more reasonable mortgage rate. So there's ways to, ways to skin it. I think sometimes people get too scared by where rates are. I think people are, are now, I think starting to become more active and say, yeah, rates aren't going, I don't lo love a six and a half percent rate or whatever, but probably not gonna be there forever. And if I could get the house, then I'm looking at the delta between that and where my refi is gonna be and I'm just factoring that into my bid strategy. And I'm not, by the way, I don't have to bid 15 or 20% over asking price either. Now I'm bidding a little bit below asking price and maybe I could catch a motivated seller.

Yeah, okay. I love those strategies. That's really that's really a, a great way to look at it. And it seems to me to, like the smart investors know these options that they have and, and but, but maybe some novices and maybe some big institutional money are what's taken off the margins of the competition and the people who are left in the middle are the operators of the long term operators and it's probably healthy for the market, I suppose.

I think so.

are you seeing any of the big, and I don't know if you could talk about this directly, but if, are you seeing any of the big institutional guys who've built up these massive portfolios over the years? Are, are they any of them saying, we wanna get out before the it crashes? Or like, are you seeing any kind of thing like that from any of those?

No, honestly not a single one. We know 'em all and they have a lot of conviction long term about it. Now, one in fairness, that's their business and that's their strategy. So they could in theory say, I'm gonna liquidate all these houses and get out. But not, not a single one of 'em believes that, that that would be the right strategy. think they're not all buying very aggressively. Some of them are starting to buy on the margins or at least make offers, but long term they're all very constructive about it. And, and what I am seeing is more and more new capital monitoring this space, interested in figuring out how to get into it at the right time.

And that's new capital like this spring,

No, this is new capital that might come in back half of this year or next year. So long-term capital that they're not gonna sort of catch a falling knife but loves the macro play with us housing. And when you think about it, we, we look at all the challenges of, of housing, but when you look at it relative to pretty much every other asset class in real estate, it compares pretty favorably. it's the most liquid. There's the beauty of, of single family rental is you've got two ways you can sell it. You could sell it on a cap rate basis to an investor, you could sell it to an owner occupant. And so, so it's almost like an apartment that's mapped for condo, right? You could, you could it or you could sell it, right? So there's this built-in optionality. You look at the office sector, very challenged.

(37:13)
A lot of people worry about retail because of online distribution, still very popular. Hotels are cyclical. it can be very good if you get at the right part of the cycle, but when you multifamily could get o overbuilt it much more easily than single family rentals, it's a lot harder to build hundreds of thousands of houses than it is hundreds of thousands of units of, of apartments. And they're largely substitutes for each other. and, and those markets are quite distinct. You, you don't see a lot of overlap between apartment dwellers and single family rental renters. So you do see that there's been a lot of vertical development in, in apartments that's gonna cause I think some softness there. So there's a lot to like about single family rentals, you know, just from a macro level. And I think we we're seeing that.

(38:03)
and the other thing about it is it's the most accessible real estate asset class for individual investors as well. People can understand it, it's pretty straightforward. It's historically been kind of difficult to do because the financing's not easy and there's a lot of paperwork and it's kind of complicated the management side. So that's where I think there's now service providers who can help with a lot of that stuff. There's a lot more data than there used to be. there's still not great financing options. We're sort of working on that. I was actually on, on the phone with someone from Fannie Mae earlier today talking to them and encouraging them to lean in and start to offer more financing products for the middle market, which they don't do today. if you're a really big owner, you get really good financing. If you're an individual owner and you wanna buy one to 10 homes, pretty good financing Fanny and Freddie programs, if you wanna own 10 to a thousand, pretty crappy.

(39:03)
And there's a lot of people who would like to migrate, you know, small business owners if you will, who'd like to build portfolios beyond that 10 and have access to kind of more robust and attractive financing. And I think there's a way, there's a really good story there to, to help build wealth amongst minorities and kind of parts of the population that historically have not had great housing access. I think there's a really interesting kind of virtuous circle that could be, that could be achieved there with some, some better financing in that that could be an on-ramp for, for lots of folks there.

That's, that is really encouraging. I always love the, the taking a step back from the, the like, Hey, you know, we're, we're buying houses to get a better, you know, yield on this thing too. Like what are, what are some positive impacts on society that this work has and like some opportunities that are in front of us.

I tell you absolutely. I mean, you've known me long enough, Mike, that's a big part of what I think about, but, but rental housing is an important part I think of the housing stock in the United States. Not everybody can afford to buy a house, at least not right now. And some people just like the flexibility of renting. And today, especially with today's interest rates, I think John Burns has done some research, it's something like 800 or a thousand dollars more to pay a mortgage on the same price home that you versus your rent. It used to be they were kind of at parody in a lot of places and now with rates higher, it's a lot of people just priced out of buying. So the more, so one of the things I was talking to the folks at Fanny about is think about all those owners of those rental homes.

(40:54)
Those are people, right? Only 3% of the single fam of the 20 million single family rentals are owned by the big institutions. 97% are owned by smaller owners. So by, by enabling more people to be able to own those homes, you are promoting housing ownership. It's just they're owning homes that other people rent and you're providing a product, an affordable product that people can live in and, and they need. And by doing all these things, we can improve the quality of the housing stock, we can provide a better service to them by promoting professional. Like one of the good things that all the big operators do is I think they generally do a very good job at the property management piece. they have brands to protect, they have technology to help cert be responsive all those things. that's not universally the case with mom and pop landlords.

(41:50)
They, they might self-manage, they may live somewhere else. so the more that we could promote the use of best practices and software and technology and things like that for that other 97%, I think the better experience there will be for others. the big, the big operators follow fair housing, for example. That's not universally the case with every mom and pop landlord, it should be, right? So more and more of these things, if we can continue to take some of the best that we've learned from the institutions, and that's kind of like part of our mission at Roofstock is let's take that technology and let's make it open to a much broader array of, of people to get the best of breed technology and all that. then I think that does sort of democratize access and I think it is good for society.

That's terrific. So you painted a, a broadly bullish view on on real estate investment, single-family investment in particular. and but one thing that strikes me is that we have a lot more investors and a lot more investment owned properties than we have had in the past like, you know, in previous recession cycles. So what are, what are risks or what happens that might change that view? What, what are things that like you know, what, what might we run into like what happens in a big job loss recession? Are, you know, what, what kind of, what kind of risks are we seeing? Are we facing? Yeah,

So it, it's interesting there's some positives and negatives to investors and I'll give you, like I mentioned one earlier that investors put a floor on housing in 2012, which was really important. Who knows how far housing would've dropped before, you know, became really cataclysmic. You have a, I think support right now on a yield basis now that there are professional investors who I mentioned will buy a 6% yield in Phoenix all day long prices in, in the price points that investors like, which is call it, you know, 150,000 to 400,000 kind of that range. They can get that sort of yield. There's, there's real downside protection on the home price that provides a floor for everybody's value, which I think is generally a good thing. And I think that will pr that will help there be much less downside risk to the vast majority of home owners that are, those aren't rental properties.

(44:31)
The, the owner occupied still two thirds of the people own homes. you know, it's interesting if you look at the stats we're, we're kind of at an eight year high of home ownership percentage. We've talked about all of this, you know, all these investors coming in and buying up the properties. We're sitting at what about 66% home ownership today it was 63%, you go back seven or eight years. So while all the investors have been coming in, amazingly the owner occupied that the percentage of homes that are owned by homeowners has gone up so they can sort of peacefully coexist. So I, I think in a big job loss recession they're gonna be more renters, right? If, if if you can't service your mortgage, you need to sell your home you, you may not be in a position to buy, so you may, you know, need to rent or you may need to move to find a job.

(45:28)
assuming that the people do go back into offices it's at some point, which I think is starting to happen. so, you know, there's some kind of, I guess my point is there's some kind of offsetting influences there. If there's a big, if there's a big job loss recession, it'll put pressure, downward pressure on rents and should put downward pressure on pricing, downward pressure on demand to some degree. so ho home price appreciation should definitely slow and in some cases go down, but I don't see it it, I could be wrong. I, i it's, I think it's very unlikely that there's gonna be a massive correction in home prices. Now if very different from say, office where, or you know, commercial in general where we have a trillion and a half dollars of, of commercial mortgages coming due in the next couple years and rates are gonna be twice as much and and values are down that's gonna be a bloodbath.

(46:28)
So wouldn't want to be in that space when you look at housing compared to that, it feels safer. and you know, again, there's, there's risk with any investment and I personally like housing because of the, the fundamental supply demand dynamic we talked about and the fact that people need a place to live. It's, it's very much kind of a utility and not in a utility sense, but, you know, seeing, you see what I'm saying? Everyone needs a place to live. So the fundamental demand for a rental home goes way up in some of these downside scenarios. So during that, the, the great financial crisis, I've got a great slide that shows prices going down every year for five years and rent's not going down during that period. So real, really sticky. And the reason for that was there were a lot of people who needed to rent. And I think the same thing could happen here where you might see some softness in demand of people able to buy, but you probably see a spike in demand and I think you'd see how's this still being full and, and maybe rent's coming down a little bit or being flattish for a while.

That's that's, those are great insights by the way. When when you that at that moment when you say you and your buddies say, Hey, time to buy office buildings, you, you call me. I'm in <laugh>, I'm in when what Gary says he's doing it, I'm in, that's the moment I'm in, I'm in with,

It may be a while, but yes, yeah,

May be a while, but when it, when it happens, I, I'm there <laugh>

It, you know, I'm waiting for someone to come up with the magic formula to convert 'em to residential. You know, it's, it's one of those things that sort of the holy grail out there got all this excess office space that no one knows what to do with and a shortage of housing, but it's really unfortunately very hard to do in, in most instances it

Is. And, and it's that I think we have not at all spent any time with the real implications of, of people never going back to the office again. And you know, how many I'm in downtown San Francisco and how many of the neighboring buildings are paid for, but unoccupied and that still has to, there's a lot to shake out there still. let's do a one last set. Let's talk about, we talked a little bit about recession, but let's talk about your forecast and, and I don't know if Roofstock has you know, official forecasts about what you think's happening with rates, recession inflation for the year. what do you think happens next there? Yeah,

So this would be Gary Beasley's thoughts, not roof stock's, thoughts. We don't have official thoughts on this. my, my own personal view and I Mike, I think I might have shared a LinkedIn post that I did, or you might have seen it on, on CPI in general. And, and if you look at the way CPI is calculated, it's, it's a, a simple sum of the prior 12 months. You take the 12 monthly numbers, you add 'em together, that's the annual cpi. So if you have 0.5 for 12 months in a row, you add it up at 6%, right? what's, what's, you've seen rates CPI come down for a few months. Now what, interestingly, when you look over the next four months, three of the highest months of inflation we've had in the cycle all over 1%, 1% or greater are dropping out of the calculation and we're gonna be replacing those with some new ones.

(49:59)
And so I did some forecasts in that, in that post. I think we're gonna see rates, the CPI go from say, you know, 6% where it is today by to say the 4% range, just the way the math works, cuz it's gonna be replaced by 0.3, 0.4, maybe even 0.5, and you're getting rid of a 1.0 or 1.2. So what's, what's that mean? Who cares? Well, the Fed cares and a lot of people care when CPI starts to show a downward trend and you layer on the impact of the banking crisis, which the best I can tell that these regional and local banks have really squeezed their lending already they're not making the loan. So again, real problem with the commercial refi because none of these local banks and regional banks are gonna be participating in those refis. So, so you're going to, that's another 50 basis points equivalent I think of like rate increases.

(50:55)
So I think Chairman Powell will be able to look to this C p I declining clearly weakness coming out of the bank failures, and I think we're starting to see a little bit of moderation in the labor market. All these things to me indicate that there's gonna be license for the Fed to stop raising soon. maybe they have one more 25% or 25 basis point raise, I think. and then I think they're probably done and then maybe by the end of the year, depending on what's going on with the economy if we're more worried about recession than inflation, maybe we start cutting. So that would be, you know, I think that's not impossible. I don't see continued raises being meaningful from this point. I think that would be too risky. I don't see cuts coming tomorrow, but I do think by year end that's quite possible.

(51:48)
I what that means is I think we're nearing probably peak mortgage rates and I think we will see rates start to come down and, and I think once the market sort of feels like the Fed's cutting, I think, you know, I think we're gonna see, I think we could be in a very different place in a year or two for sure in terms of rates. so what does that mean? Does it mean we're not gonna have a recession? No I think it's a recession's probably likely in the back half of the year, but you know what that, how that manifests itself in terms of the housing market, it, you know, we've had recessions before where real estate has not been as directly impacted. so I think I, I think real estate is gonna do okay, residential is going to do okay over this cycle.

(52:42)
I in particular, if I'm right about rates, which by the way I could be totally wrong, that's, but I try to have an informed view based on everything that I read and that's the best view that I can have there. There's certainly scenarios that where that's not gonna be the case and there are a lot of exogenous factors that you just sort of can't fe what, what's going on with, you know, war Ukraine and supply chain and, you know, there's a lot of stuff that that can influence it, but holding all that other stuff constant, that's sort of how I think about it, which is generally I think pretty good for housing.

Really appreciate that. Take one of the other elements of the C P I that is worth watching, I think, is that the housing part of CPI is lagging and it, it has maybe nine to 12 months old data in there in the, in the current cpi and we're at the tail end of when things were really rising last year. And so those are even gonna go so it, it could accelerate the downtrend of C P I later in the year. Well Carrie, this has been really, really terrific. I could keep going for a long time, but I really appreciate the, your, your views. I appreciate the, the work that the rooftop's doing and, and and thank you for taking the time with us today. real quick, you, I know you write stuff on LinkedIn. Is that the best place for people to follow you connect? Yeah,

Probably.

Yeah. Great. And of course, go to Roofstock. If you don't know Roofstock, go to Roofstock. And especially for real estate investors, it's a really tremendous a really fascinating, and, and I, I remember you told the story about being on a plane sitting next to a guy and ha watching him invest in real estate next to you, sitting on the plane while you talked to him and told him about the business.

And I, I, I can't tell you what his wife said when he landed and he text me

<laugh>,

I can't, cannot be repeated and in a recorded format, but but

You know, you know, whatever it was five, six years later, that was a good deal. That was a great

Deal. Well, it was a house in Atlanta that he bought for $150,000 and he thought it was the down payment when he was looking over my shoulder and I said, no, man, that's the whole price. He said, oh my God, I could, I could buy a house for 150. And it was a beautiful two story brick house in Atlanta. This was a number of years ago. That house is probably two 50 today, but he and his wife have been trying to buy a house here in the Bay Area and it was like 600 grand for any sort of rental property that he says, I'm gonna buy four of these. She's gonna be so happy.

<laugh>. Yeah. And that's the magic that's really, really terrific. what a great story. Okay Gary, thank you so much everybody. This is the top of Mind podcast. You know where to find us@elaltosresearch.com. I'm Mike Simonson. Thank you so much. We'll be back in a week or two. Thanks for listening to Top of Mind. If you enjoy the show, I'd really appreciate leaving a nice review on your favorite podcast app that helps other people find us as well. Be sure to subscribe so you don't miss future episodes.