Tyler Laprade is a software developer in Manhattan — and a landlord in Ohio and Alabama. The 24-year-old was already invested in the stock market, but he wanted to diversify, as well as receive steady monthly income from his investments.
“The market’s good sometimes, it’s bad sometimes, but rental income is consistent. Each month you get the same amount from the tenant. You don’t have to worry about how much it’s going to be, so there is less variation from month to month,” said Laprade.
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But Laprade couldn’t invest in his pricey backyard because the cost of getting in was too high compared to the returns. He wanted to purchase homes in the $50,000 to $100,000 range, which are few and far between in the New York City area. So he turned to a company called HomeUnion for help.
“I’m a young, working professional. I don’t have time to fly all over the country looking at hundreds of houses, seeing which has the best cash flow,” he said. “HomeUnion takes the stress out of it for me.”
Irvine, California-based HomeUnion was founded in 2009, during the height of the foreclosure crisis, as something of a middleman for individual real estate investors looking to become landlords. It helped smaller investors to compete with big institutional firms that were scooping up distressed properties across the nation by the thousands and creating a whole new asset class of single-family rentals.
“What we are changing is allowing these retail investors to invest in a more institutional way,” said Don Ganguly, co-founder and CEO of HomeUnion. “A retail investor didn’t have data, didn’t have a way to calibrate assets, didn’t have a way to do due diligence in neighborhoods. If they even were able to do all that, they didn’t have a good way to go acquire that property, manage it remotely. So as a result of that most people were investing in their own backyards.”
HomeUnion does the legwork from start to finish. Operating in 11 local markets, it locates properties, renovates them to a company standard, finds renters, manages the property and, perhaps most importantly, advises the clients. All, of course, for a fee. It also has a lending arm, selling the loans to Fannie Mae and Freddie Mac, which allow individuals to qualify for up to 10 investor loans. Ganguly likens the company to any other investment firm.
“It’s similar to you walking into like a Fidelity, saying ‘I’ve got to invest.’ They put you in a set of mutual funds, and they manage those funds for you. We’ve sort of taken the same type of playbook by being able to calibrate residential real estate you couldn’t calibrate,” said Ganguly.
“We’ve got 100 million properties, we’ve got 200,000 neighborhoods, we’ve got 20 years of transaction data, we rank neighborhoods from A plus to C, and they rank based on yield, risk and the amount of growth we expect, so we can take these — just like you can take an A bond or BBB bond — those kind of calibrations actually help us to match investor preferences to assets as opposed to the old way.”
While one of the largest, HomeUnion is part of a fast-growing cottage industry of online real estate investment management firms. Institutional investors got a lot of attention during the housing crisis, but in the end they only purchased about 300,000 properties, barely a nibble at the total stock of about 18 million single-family rental homes. As institutional investors now pull back on buying, small investors, who make up the vast majority of the market, are facing less competition and are looking for more assets.
Wally Charnoff began tracking foreclosures at the height of the housing crash — watching distressed home sales, prices and rents. His data were so deep that his company quickly attracted institutional investors.
“When Wall Street came into the space, a lot of tools and sophistication chased them in,” said Charnoff. “Once Wall Street said, ‘Hey this is an asset class that we’re going to pay attention to,’ then companies started developing data analytics, technologies, acquisition tools.”
His small company, RentRange, grew exponentially. Just over a year ago it was acquired, along with real estate search firm Investability, by Altisource, a financial services firm for the real estate and mortgage markets. Charnoff now heads Investability, an online residential real estate search and acquisition platform that relies heavily on housing market data analytics.
“All of the products and services we’ve developed, we try to keep the pricing model and the offerings themselves geared towards helping the investor put their money to work as efficiently as possible,” said Charnoff, who adds that the fees are in line with the traditional real estate fees you would pay when you buy a home to live in.
Investability and HomeUnion operate nationally; many others focus on local markets. These firms make it easy to invest, but they don’t negate the risk involved in any real estate transaction. As the nation learned barely a decade ago, home prices go up, but they also go down. Ironically, the epic housing crash was the impetus for the rise of these companies. Becoming a landlord is now easier, but the pitfalls remain.
“It’s normally a very rosy picture, but sometimes tenants don’t pay their bills, tenants move out and you have to turn the property, dishwashers break, roofs leak, so one thing I’d say is when you purchase real estate as an investor, it’s really important to have a good project manager,” said Charnoff, whose company helps investors secure property management as well.
“It’s really important to understand some of the expenses that go into owning single family rentals as an investment and really be prepared for times when the income isn’t there and when the house might need maintenance or repair.”
Rental demand is currently high, as the nation’s home ownership rate recently hit a 50-year low. The housing market is improving, and home sales are rising, but so are mortgage rates and home prices. Rentals have historically made up at least 10 percent of the single-family housing stock, but about a million more rental homes were added over the course of the foreclosure crisis.
“I see servicing the single family rental space as a growing industry. I think we’re going to see more and more market entrants enter the space,” said Charnoff.
‘Holy grail of real estate’
Ganguly agrees. His company not only helps investors buy rental homes, it also helps them sell to other investors. HomeUnion is currently in another round of funding and is considering going public.
“So this, as the platform grows, is sort of holy grail of real estate, which is liquidity. Investors are going to begin to trade with other investors’ performing assets, and we would just simply continue to manage them switch investors in the platform
These firms, however, are not geared toward flippers.
“I don’t buy for appreciation. I see that as icing on the cake,” said Laprade. “I’m just looking for the cash flow. It’s a snowballing effect. The more I acquire, the easier it is to save up for the next one.”
He said he hopes to buy four more this year. While the firms do much of the dirty work, Laprade advises investors to do their own homework.
“Do your research. Do as much reading as you can about real estate, about investing in general. Even though HomeUnion is taking care of a lot of the paperwork for me, I make sure to teach myself exactly what is going on behind the scenes, so I won’t get caught off guard,” he said.