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Sept. 29, 2018, 3:59 p.m. EDT

The new housing play: helping priced-out renters become long-distance landlords

Like many money-making ideas in real estate, this one comes with rosy assumptions — but are they justified?

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By Andrea Riquier

Leland Char is a 28-year-old product manager for a large San Francisco–based tech company. He loves the Bay Area’s “very authentic Asian food and New American cuisine, smart, well-educated people, the multiple job opportunities, the friends that I’ve made, and fantastic hiking.”

What Char hates is the house prices, and the fact that, even with dual incomes, he and his fiancée can scarcely afford to buy a home in their community, let alone have in-laws join them as they put down roots.

So he settled on a solution that’s unorthodox, but which suits him: He bought eight houses in Texas.

He’ll continue to rent in San Francisco, and has leased out the far less expensive properties in Texas, expecting to reap a better return than he could from stocks or bonds, while also building equity.

Char, who built extensive spreadsheet models with all kinds of scenarios to test assumptions, doesn’t see a contradiction in becoming a “first-time homeowner” of a property he may never set foot in. Like a good tech worker, he found a way to make his investments online, using a fintech startup called Roofstock.

Launched in late 2015, Roofstock is one of the leading platforms for the burgeoning market in single-family-house rentals for long-distance investors. While there have been landlords for as long as there’s been property, this particular market moved in a different direction in the aftermath of the housing crisis, when large institutional investors like Blackstone began scooping up houses by the thousands at fire-sale prices in order to rent them out.

‘It’s great to bring technology to bear on those challenges of owning property thousands of miles away, but it does boil down to making sure you can trust those boots on the ground.’

Daren Blomquist, Attom Data Solutions

Now a new crop of individuals, like Char, are eyeing the big players’ business model and adapting it to their circumstances. Rather than trying to swing the purchase of an expensive home by renting out the basement, or pursuing an extra income stream by buying and renting out a nearby property, platforms like Roofstock, HomeUnion and Investability make it possible to research, purchase, finance, lease out and manage rental properties, regardless of geographical locations, with just a few clicks. For many investors, those properties are thousands of miles away, where prices for many investors are vastly lower, rental demand for houses is constant, and, in many cases, courts and regulations tend to side with landlords, not tenants.

The business model has a lot of merit, and Char told MarketWatch he’d had “a great experience” and would recommend Roofstock to others. Still, like many new investment propositions, it also carries risk. Some industry observers wonder if novice investors, especially those who may not have clear memories of the housing crash, are really prepared for possible downsides. And a decade after the crisis, others question whether the overall housing market can withstand another deluge of investors whose interest is detached from the communities in which their money is being put to work.

Read: Forget flipping houses — these retail investors flip mortgages

Daren Blomquist has watched plenty of new ventures spring up in the nearly two decades he’s been lead spokesman for real-estate service provider Attom Data Solutions. Blomquist put it this way: “It’s great to bring technology to bear on those challenges of owning property thousands of miles away, but it does boil down to making sure you can trust those boots on the ground and those eyes and ears in that market to be working in your best interest. It’s going to take time for platforms like Roofstock to establish that trust with buyers. I think technology can go a long way but hasn’t been fully proven yet in my mind.”

A few minutes browsing on Roofstock.com gives a sense of what Blomquist means by “technology can go a long way.” On a recent morning, 322 properties were available for sale . Clicking on any one shows the precise address as well as a treasure trove of data: results of an inspection, tenant occupancy and current rental payment information, a Roofstock reckoning of the quality of the neighborhood, and more. And there are extensive assumptions, all of which can be fiddled with: property taxes, property management fees, repairs and maintenance set-asides, and more.

Roofstock doesn’t own any of the properties on its site. It brokers them for a 2.5% fee — much cheaper than the standard 6% that most real-estate agents charge. (Buyers also pay a 0.5% fee.) But more important to sellers may be the fact that the platform enables quick, seamless sales that don’t disrupt cash flow from tenants already living in the homes.

HomeUnion, Altisource’s Investability and OwnAmerica offer similar — but less robust — online data about their properties, one reason Blomquist labeled Roofstock “the most mature” of the platforms.

And while Blomquist offered healthy skepticism about the model, arguing that out-of-town investors should always visit the areas in which they’re thinking of buying and get their own independent third-party inspection, he also sees a big benefit to having larger, more prominent firms taking a leadership role in this marketplace, he said. “Where we hear horror stories is with small regional players.”

Consider this recent exchange in the online real-estate chat room Bigger Pockets, in which a California resident wrote about a “ Turnkey nightmare with Morris Invest .” The conversation generated over 200 responses, many of them echoing stories of subpar work on the part of Morris Invest, the fix-and-flip company founded by former “Fox and Friends” host Clayton Morris. (Morris Invest did not respond to a MarketWatch request for comment.)

“I do think the benefit of having a name brand out there is that there is some credibility at stake,” Blomquist told MarketWatch. “I think that they’re trying to avoid those worst-case scenarios.”

Also read: California exodus gathers strength, as home prices continue upward march

So far, Char hasn’t had anything close to a “worst-case scenario.” Still, since closing on his properties late last year, he said he’s faced around $20,000 of unexpected expenses, including remodeling, HVAC upgrades and plumbing. He is trying to get a sense of how many of those expenses may recur and which were simply one-time needs.

He’s also trying to decide how comfortable he should be with his current property manager, or whether he should look for a new one.

One of Roofstock’s pitches is that its buying power enables it to negotiate with individual property managers around the country, bringing a level of professionalization and transparent pricing to a business that’s the epitome of local, low-tech and reactive.

Both steps demonstrate how much care Char is putting into the process — but also serve as a reminder that an investment marketed as “passive” may require a lot more effort than may be apparent from financial model spreadsheets.

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