This Week in Startups - E1095 The Next Unicorns E13: Roofstock CEO Gary Beasley is creating the real estate cloud, opening residential investing to millennials & more

Episode Date: August 12, 2020

Check out Roofstock: https://www.roofstock.com Follow Gary: https://twitter.com/garybeas2013 Follow Jason: https://linktr.ee/calacanis Thanks to our partners... LinkedIn Jobs - Get $50 off your first job post at https://linkedin.com/unicorn Zendesk - 6 months free at https://www.zendesk.com/twist

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Hey, everybody. Welcome back to this weekend startups. It's your boy, Jay Cow. Hosting you here during the summer of the pandemic in 2020, hoping you and your family are okay end that you're figuring out if you've got kids, school for the new year, and I hope work is going well, and that we're going to get through this soon. I am an optimist. I think we will. And getting down to business, we had a wonderful series in the last year called the next unicorns. Or, as we call it internally, sunicorns. What's a unicorn? Unicorns are companies that get valued at a billion dollars or more in Silicon Valley, the valuation of the company, not the revenue. But the evaluation is usually based on some large amount of revenue and some sustainability.

And it's arbitrary, sure, but it's important because it means a company's getting to scale and that they have a chance of maybe going public or changing the world in some deep and meaningful way. And it's kind of fun to see if we will be able to predict that these are, in fact, unicorns. We'll look at the first 10 we did and we'll see what percentage we hit. We'll look at this 10, we'll see what percentage we hit. That'll be really interesting. And we've asked a lot of you to tell us which companies you think are breaking out, our investor friends out there or founders. And you can always do that by just emailing me

or DMing me on the Twitter at Jason or Jason at calicannis.com, my first name and my last name. And if you want to be part of our super secret Slack group where just thousands of people a week are talking shop, there's probably a couple hundred people who are really into it, talking about building their startups. You just go to this week in startups.com slash Slack

and you fill out a form. You promise us you're not going to spam the Slack channel. And we will invite you to join us and talk shop, everything from fundraising to product development, ideas. We have a book club in there. It's kind of fun. It's an interesting little experiment, and we're happy to be on it on that little journey with all of you. So the first two companies we did were in health care and in housing. And it's no doubt that health care and housing are on the list of sunicorns because these are huge, huge issues in our life.

Right. Transportation, Uber. And then food, postmates, Uber eats. And then you look at health, tons of companies in health. And you look at housing, tons of companies and housing, but they're very difficult. Building meaningful companies means you're taking on spaces that sometimes have incumbents, that are sometimes resistant to change, and that are sometimes just very complex. Housing is one of them. We've made a couple of investments there. You may have heard of blockable, BLOK, ably.com. They're building modular housing in factories, kind of like the Tesla of housing. Well, today, we're going to talk to Gary Beasley, who's from Roof Stock, and he's got an interesting take on housing. And it's very interesting to have you here on the podcast, Gary, because we're taping this during a pandemic. And I was listening to

a podcast you did on some niche real estate podcast. And you were talking in November of 2019 about, you know, there could be a downturn at some point. And, you know, if that happens, here's what's, here's my views on the world. So welcome to the podcast. And my first question is, are we in an acute housing downturn right now? It's July, end of July 2020. When we're taping this, this will come out in August 2020. Not yet. I think what we're seeing is almost the opposite. It's defined gravity a little bit, Jason. It's a little bit like the stock market, which today seems a little bit disconnected to the real economy. What you're seeing in housing is, for the most part, especially if you get out of the urban areas and the high end, prices have really held up quite well. You're still

seeing price increases, very low inventory. And so that shortage of supply and the low interest rates are really contributing to, I think, still more of a bull housing market. You know, more like three going to have four months of supply, not six, which might be more of an equilibrium. So I would say we're going to have to wait and see how things transpire over the next six to 12 months because I think there are some offsetting effects that will be at play and we'll see which dominate. So there are a number of factors. It's multi-variable here.

One is interest rates are historic lows. That is a massive contributor, correct? Absolutely. And it's, is that sustainable? These historic lows, was it 3% was the average mortgage in the last month or two? Yeah, you're seeing some sub 3%. So really pretty much historic lows. What's interesting is I think it is sustainable in particular, because that is something that's largely in the country, you know, something, it's policy that's largely dictated by the Fed. if indeed you see so much global weakness and uncertainty, I think we're in an area of cheap money for a while. And it's one of the things that I don't expect to go up meaningfully anytime soon.

There are very few things that I feel that certain about. Yeah. If we're printing trillions of dollars and giving unemployment to the level, no judgments here, but we're giving unemployment to the level that some people are making 150 or 200% of their salary, the idea that people who want a mortgage can get a low rate is pretty easy table stakes. And then you also have this pent up demand because people weren't able to see houses for three or four months. So certainly that's contributing, right? Yeah, absolutely. I think also being trapped at home is making people over index almost on the importance of where they're.

So in fact, we'll talk about our business a little bit, but we traffic and rental housing, right? And so we were at record occupancies, record leasing, people don't want to move. And I think it's the same thing, people moving out of cities, buying homes where there's more space. And people buying bigger houses because now they're looking at perhaps a work from home environment for the medium term, maybe long term. And so people are trading up and buying more space. Got it. So to confirm, and we'll get to Roofstock in a moment, I just want to set the stage here in the housing market. you have people who are looking at interest rates that are an all-time low.

You have a little pent-up demand because people haven't been able to view homes for three or four months when they're shelter and place orders and that's being lifted. And then you add to that people are anticipating some percentage of people that they're going to be staying at home and working from home on some permanent or semi-permanid basis, which means a family that needed a three or four- or four- or five- or six-bedroom or an ADU or converting the garage into an office, whatever it takes. And then you add to this flight out of cities because people believe that because of work from home, they can have a better lifestyle. They don't need to be at the office. That's one. And number two, maybe cities are a little bit dangerous because pandemics will spread in them quicker.

So you put all this together. It's creating movement. And in real estate, movement is good for business, correct? Yeah, it creates transactions. So absolutely. Yeah, I think all of those are important factors, and I don't see any of them changing dramatically in the near term. People are fleeing cities. Maybe they're leaving because they're afraid of the pandemic.

Maybe they're leaving because their boss gave them the green light that they could work from home for some extended period of time. And there was a lot of supply outside of cities of homes, it seems. And inside of cities, we have this massive crunch and a housing crisis. what happens now with this great flippinging that's happened where people don't want to be in cities and they don't need to be and cities are expensive and the country's cheap and it's better. And the only reason you weren't there previously was because your boss didn't allow it. And now your boss is saying go for it. Classic economics, right?

Supply and demand. So you have less expensive, more plentiful housing outside of cities. Although the one thing I would slightly take issue with in most areas, we didn't really have a large supply. of existing inventory. It was still relatively light by historical standards, but it certainly wasn't as tight as in some of the urban areas. Got it. But I would say you are seeing more vacancies,

and especially at the high end in some of the cities where people are moving out and have the ability to just walk away from places and get places in less expensive areas. You're seeing a resurgence in places outside in New York City. you know, people going back to Connecticut or out to the Hamptons and renting places for a year. Lots of that stuff happening. And so I do have some concerns about the people, the impact not only in the housing market in places like New York,

but all the small businesses supported by all the people living there. Right. That's going to certainly be acute. Yeah. I mean, you don't need as many restaurants for eye cleaners. Even schools and teachers, they might be downsizing as well if people are going to go, you know, and flee to the suburbs. Absolutely. All right.

When we get back from this quick break, I want to know how this is impacting your business roofstock and what roofstock is because that's super important to understand as well when we get back on the screen startups. All right. I want to give you $50 right now off from LinkedIn Jobs, which is the greatest place for you to find talent. I have found so many members of my team through LinkedIn Jobs. And I'm going to give you $50 with a special code at the end of this quick ad read. And I just want to tell you about a testimonial from one of you, one of my listeners, Aaron Mason, emailed me and they said, hey, J-Cal, I used your code. I got for $50 off. And he is the founder and

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LinkedIn.com slash unicorn. All right, welcome back to this weekend startups. It's our special, The Next Unicorns. You can see Daphne, Kohler, from InC-Tro, and Nikki Peckett from Homebound on the first two episodes. And Gary Beasley is our guest today from Roof Stock, S-T-O-C. So tell us, what is Roof Stock, and how do you make money? We're a marketplace for residential housing

that can be traded through our platform completely online. So think about us a bit like an Amazon for houses. We bring suppliers of homes together who want to sell them and buyers of homes who want to buy them. And we do all the work through our platform. So we really sort of turn the transaction process upside down by breaking down the geographic barriers to real estate investing. So you could be sitting in Hillsborough, buying homes in Memphis or anywhere in the U.S. with all the information that you need at your fingertips. So that's really the idea is to break down those geographic barriers

and have a completely sort of digital experience. And so we make money by charging buyers and sellers a fee, principally sellers, a fee as transactions happen through the site. And then we also charge a small fee to the buy side. What is that? Oh, 50 base points to the buy side. So if I buy a million dollar home, 1% of that would be 10, 50 base points would be 5,000.

So I pay you $5,000 for buying the million dollar home. What would I have done as a buyer of homes previously? Because you're still paying the real estate agent fees and that kind of stuff? No. No, that's your entire cost as a buyer. And what we do is that really kind of compensates us for the work that we do preparing homes for sale. We do all the diligence and pay for that.

And then the seller is putting this, the seller puts this stuff online with you and you act as the broker selling it? Correct. So think about it if you have a home and we don't sell a lot of million-dollar homes. Our platform is really designed for 100 to $300,000 homes in lower cost markets around the US. So take a typical $150,000 home with a tenant in it. So you're buying a home that's already leased typically.

That's our model. So we've got the home itself with an inspect. We vet local property managers and we vet the tenant and create a diligence room for you. So you can you see all that information up front. And we charge sellers typically 3% to sell. And that's the entire cost to the seller. And the seller doesn't have to vacate the home to sell it. So we then pay for the diligence.

We bring buyers to the table and facilitate those transactions. And so I was just looking yesterday, the average home that sells through our platform, goes under contract in less than 10 days. So that we have very good liquidity because we're bringing buyers from really all over the world to buying these homes that are packaged up nicely that could be purchased from anywhere. So if I was a real estate investor and I wanted to do this previously, I would have probably picked a house that's within whatever, you know, an hour's drive so I can manage it or I could deal with vendors there, which means I'm buying,

in the same, if I'm an investor, I'm buying in the same region, which means it's going to be super highly correlated. And I probably, if I can afford to buy one, I'd probably own an expensive house in that area. So it doesn't give me any diversification. And what are the chances at the place I've chosen to live as an affluent person, say Los Angeles, New York, San Francisco, Chicago, is the place that's going to appreciate most next. That's probably not correct. Is that right? We hit the nail on the head. So this, this allows you to diversify over 70% of homes of investment homes are owned within an hour drive of where the resident lives, the investor lives.

So by breaking that mold, you could be buying in lower cost markets for the cost, the price of one home within an hour's drive of you, Jason, you could buy three, four, five homes in another part of the country that have better yield or unforelated, as you pointed out. Because if you do have a downturn in the Bay Area or in any other places, it typically affects your job, your primary home equity and your secondary home equity if it's there. So you're just getting walloped by the same tidal wave if it does in fact come as opposed to being diversified, which is the whole point of this. Now, if I were to buy in a place, I don't know, I thought Arizona or Texas, Houston, you know, with a big boom areas, I'm not sure if that's still correct. And I wanted to

buy in those suburbs, if I prior to using roof stock, I would have to get on a plane or hire a consultant them to do that? Yeah. The old way is you would probably look online and see a bunch of listings that might be for sale. You would line up a bunch of tours in advance by talking to a bunch of listing agents and then you would fly to Houston or fly to Atlanta and you would go look at houses. You'd make a bunch of offers and hopefully get something. And then once you get something, you would find a contractor, you'd find a property manager. And you'd try to to coordinate all this remotely, which is quite difficult. So what we've done is essentially created the real estate investment cloud, if you will. You plug into our infrastructure,

and you never have to leave your couch. You can do all the underwriting from there. You could you know, select your property manager from there, do all your research from there, all that's provided for you. And these homes are typically already occupied, so you don't have have upfront renovations that are typical if you're buying a house that needs a lot of work. But even so, if it does need work, we have local contractor relationships and we certify local property managers. So you can outsource the day-to-day management and view it much more like an investment as opposed to trying to do something in the old school way of flying there and just trying to

buy houses. So I buy 150K house. You get 3.5% of that or so. So that means you make your 5-6K. which is fine. It sounds like you earn that, obviously, by vetting them and vetting the tenant. What does vetting the tenant in this case be? Because my understanding is when you're buying homes, they're worth more when there's not a tenant. But you're saying that you're diligentcing the tenant. So does that mean it's worth more with a tenant that's been diligence? How does that work?

I would say what we try to do is take what historically has been a liability and turn it into an asset. So if you're an investor and you want a rental home, you can buy a vacant home and have an estimate of what the rent is and then put a tenant in there. Or you could buy a home that already has a tenant in it that's been inspected where we've reviewed the tenant payment history and the criteria for getting the tenant approved in that home. And you're stepping into something that has arguably more certainty than even buying a vacant home. The reason that buying a tenant occupied home in the past is viewed as a liability is oftentimes those were homes that might be have been foreclosed on where there's the old borrower might be living in there rent-free and they won't leave or you don't know anything about the tenant that's in there.

So it's high risk. There could be some liability and you remove that. If you're buying something off the MLS that has a tenant in it, you're probably not going to have a lot of information on it. So when you buy something off roofstock, because we get access to all that information, we do the inspections, the tenant review all that, we make it all available to you. So it actually derricks it. And so in some ways, a lot of people who are buying the homes from us,

have a tenant in place oftentimes with six or more months left on their lease as a real asset. And so in many cases, we're finding the tenanted assets are worth more because you don't have any vacancy. Yeah. Doesn't it also make the price of the home more accurate if you actually have the tenant in there? Because I can see a real estate broker saying, yeah, you'll get $7,000 for this house and that, you know, a year in rent or whatever. Or $17,000 a year in rent for this house. But the reality is you're going to get $14 or whatever it is. Yeah.

Yeah. So it's verified by the market, right? Right. There's a tenant in there. You want to make sure that it wasn't a sweetheart deal and it wasn't the guy's brother-in-law or something like that. Ah, right. They got four months free. They're paying above market rent.

And we help check that anyway as part of our diligence. So is that your business, is just that making that $5,000 every time you sell a home, or is there some bigger plan here? So that's part of our business. We have a pretty large institutional business as well. Ah, because I was about to say that first business sounds good, but not great. So tell me about this institutional business. There are a million single family rental home trades a year.

Ah, okay. And out of the five million homes that sell a year, a million of them are two investors. And so there's three trillion of single-family rental homes. So it's a massive, you mentioned market size earlier. So residential housing is the largest asset class arguably in the world at $25 trillion. The single-family rental home with long-term leases in it is about $3 trillion. So that is a massive market. So the retail market, we think, has enormous potential to disrupt the way the traditional assets trade. On the institutional side, the majority of our business today is actually institutional,

where we represent either large institutional owners who want to sell big portfolios or institutional capital wants to build their own portfolios, and they can plug into our system and use it to either build their own or sell their portfolio very efficiently. because we know who all the buyers and sellers are as a marketplace so we could very efficiently help them make those trades. And so, and on the institutional side, we'll charge more like 1% on a $100 million transaction, where we'll charge, say, 3% on a $100,000 house. So that's the way it works. Got it. When we get back from this quick break, I want to understand that institutional side.

And then is this like what I do with Angel investing in syndicates where people can buy into portfolios of homes, as opposed to dealing with the arduous nature of managing just one or two or three when we get back on the sweet startups. Everybody knows that Zendesk is the go-to tool for customer support. We all know that. It is the standard, the gold standard, in fact. But what you may not know is that Zendesk also offers a suite of sales tools, huh, designed to remove the difficulties of sales software

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series A or below, just go to Zendesk.com slash twist and get it for free for six months. And don't forget to check out Zendesk's new podcast, sit down, start up, available on all major podcasting platforms. Every customer counts when you're a startup, especially now. So start building the best customer experiences with Zendesk. Welcome back. Gary Beasley is with us and his company's roofstock. They've raised a bunch of money. And they are helping people buy single family homes for rental with the renters in them, as we've heard already. But there's this other business, which is really interesting because even if you got a 10% of those million people buying homes 100,000 of them and you were charging them 5,000. It's a good business, but this business of being able to bundle

homes and the management of them seems to be even better. But doesn't that business already exist and it's called a reet? So the thing to think about with reits, and I used to run a public reed, they're good for many reasons. You get broad diversification. You have great liquidity, but you have to remember they are stocks. Ah, right? So they're much more correlated with the equity market. Nice thing about property itself is it's essentially uncorrelated to equities. And it's less volatile.

So if you want direct exposure to a housing market, you can either buy homes directly through our typical site or other means. Or you can actually buy shares of homes through our product, which is called Roofstock 1. And that is actually, we're currently sold out of shares who are in the process of relaunching with more inventory. But we figured out how to package up a home and securitize it and sell off the equity in the form of shares. So you could buy 10th shares of homes that have already been purchased by us, renovated,

leased out, insured, financed. And you can. So you'll manage all of that for the investors then? Yes, totally passive for the investors. So it's a way to get that exposure. and you could sprinkle around $25, $50,000, $100,000 across and build your own portfolio. So what you don't get with a read is an ability to say, I want to buy homes in Austin, Charlotte, Denver, and Nashville. This way you could pick homes and pick markets and play those markets and outsource all of the work to us.

Got it. And for you guys, that means you get paid a little extra because you're managing the home as well, yeah. And we also make a little bit of spread on the buy and the sell because we so you get carry which yeah we charge a well we charge a fee up front to basically package it up and and sell the equity and then we get ongoing fees to manage it as well got it. Do you get like a 20% carry like I do on the investment? No no no we don't have a carry structure. So what are the things we're trying to do. That's a bummer. You know, try to keep the fees out quite low and make it very investor friendly. so we could create great liquidity and attract a lot of capital. We'll make plenty of money on our upfront fees and our ongoing management fees. Yeah. And getting the carry, though, would mean you were aligned with the investors to pick the best homes and, you know, bundle them together with the goal of eventually an exit.

But is that what people are looking for? Are they looking for exits or are they looking for dividends? People are really looking for dividend. And we've structured in our, in fact, in our new program to create more alignment, And what we're doing is we're structuring our fee. So a portion of it is an incentive fee based on the yield that's generated. Ah, based on the dividend. Got it.

What we found is people don't want to trade these things very frequently, although they can sell the shares. What they really want to do is buy the shares, get the exposure. It's tax efficient. It's uncorrelated. And then clip the coupons. Got it. And so if I had a million dollars in something like this, what would I expect in terms of

return? What would the range be? So the range of single-family rental home returns, generally, whether it's in the form of the security or in our regular marketplace, is your current yield tends to be five, six, seven percent kind of in that range, depending on if you're in a really nice neighborhood, which is a little bit lower yielding to maybe a lower-priced home, which is a little more risk, a little more yield. then you get, depending on how much leverage you put on it, if it's, say, 3% annual appreciation at the asset level and you lever it three to one, you could target double-digit returns on your equity over time. I think a lot of people are targeting kind of 12-ish to 14%. Explain what that means to lever it up.

What does that mean? You can borrow against these single-family rental homes, just like you can borrow against your primary residence. You can borrow to be up to 80%. percent of the purchase price. So you can buy a $100,000 home for $20,000 down. You can borrow the rest through a Fannie or Freddie program. So then I'm paying 3% on that. And then the spread, if I'm making 5 or 6 or 7% a year is, whatever the difference is. And then that allows me to buy the next home and the next home quicker, correct? Yeah. And the borrowing cost isn't quite as low as

3% because you pay about 100 basis points more generally for an investor loan. So you're still in the in the low fours today. Got it. But it's accretive typically to the to the unlevered yield. So you get some some nice accretion there. And then you get levered exposure to your home price appreciation. So as you know, your equity could go up many times faster when you're using debt. And so this is what people have been doing here.

And I've watched people in San Francisco doing this with commercial real estate. And so they got themselves in a little bit of a jam ski because they may have bought, you know, the fifth, sixth, seventh one, levered it up to buy the eighth, ninth, and then they lose their tenants, and then they've got to pay the rent on those. So that is the danger of getting too levered, correct? Absolutely. The nice thing about this asset class, unlike commercial, is commercial is very lumpy. So if you have an office building that's five floors, you might have five tenants, or you might have one tenant in the whole building. That company leaves, you're really in trouble.

With these homes, there are so many substitutes for a tenant of a $1,500 or $2,000 rent that typically there's waiting lists. So the certainty of cash flow is higher. The liquidity of being able to sell a home, if for whatever reason you want to sell it to an owner-occupant, if it's vacant, you just want to get out of it. There's a very liquid market for homes. Yeah. So that's the difference between that and the commercial piece.

Yeah. now in San Francisco, the commercial piece is collapsing as everybody goes to work from home. What do you're, I mean, I know you're not, you're not in the commercial space, right, at all? No, we're not. I've got some experience in the commercial space from earlier in my career, but I've never seen anything like it. I used to be in the hotel business. I ran Juad de Ville hotels for a while.

I was in. You went Juad of Yves? Oh, wow. You ran that? I did. I did. Did you guys own the Phoenix in San Francisco? Yeah.

So Chip Conley, who was the founder. Yes, who went to Airbnb for a bit, right? Exactly. So Chip's awesome. So we invested in Chip's company when I was working in private equity, and I took Chip's job as CEO, and Chip became a woman. Then we worked together for a year. Hotel business is tough, huh?

It's tough in these times for sure, right? Yeah. Well, before this, though, it was tough, but fun. Tough but fun. It's a very cyclical business. And so it's a very, it's a challenging business today. You mentioned office, very, very difficult to think about long-term exposure to office. Retail, bricks and mortar retail is another challenging one when you look at, you know, some of the new players there.

So when you kind of look through all these others, I think you look to industrial as or kind of warehouse space is being pretty secure in a growth area or distribution space. Why is that? Because of all the Amazon warehousing news? Absolutely. Yeah, it's all distribution. There's just a that. And you're seeing a huge amount of, in certain parts of the country, a warehouse space being leased to grow cannabis. Ah, who knew? So I want to just stop for Joie de V and just tell people about the Phoenix Hotel here. When I was broke and I would come to San Francisco. It was like $99 a night or $109 a night. but it was like a very cool rock and roll hotel where the pool the bottom of the pool was painted by some famous artist i can't remember who um but it was like a bungalow set up just off the tenderloin or something around there and uh it was a groovy place to go stay it was like a rock and roll place chip's a brilliant uh he's a very creative guy and he discovered um he was really in in some regards the father of the boutique hotel

movement. Yes. Yeah. And when we invested in this company and I took over to run it, I think we probably had 40 hotels. It's now gone through a couple of acquisitions and is now no longer an independent chain, but it is phenomenal. And each hotel had its own theme. And, you know, Chip's idea was to have two magazines that would, that you'd marry together. You'd have to have two magazines. You'd have to have two magazines, if the car were two magazines, or what car would it be, what two magazines would it be, what song or album or rock group or musical group would it be? And that's how he created these personas around. Wow. So it was a great framework that I think he developed himself. And so when you'd go into these hotels, you'd see a couple of magazines and you wouldn't know the significance

of it. But it was, these are the magazines that provided the inspiration for those particular hotels. So interesting. I was in the magazine businesses. like such a lost art form when you think about it that we used to have. You said that the commercial space is like nothing you've ever seen. I'm sitting here in San Francisco. It's an absolute unmitigated disaster. Tents all over the street, suffering like you've never seen, and moving trucks taking companies, desks, laptops, monitors,

and people to the suburbs and on to Austin and Miami and Nevada and other places. What do you think, and you and I are both here in the Bay Area, what is going to happen to San Francisco when this tax basis drops from all the most affluent people who can move, move? And then after they built all these high rises that are, we're $1,400, $1,400 a square foot, and then all this office space is empty. What is going to happen? Well, I think you've just painted a picture of dramatic potential reset and values. I think that that's quite likely. I think it's hard to make a case that that's not going to happen. It's just a question to what degree.

In my view, we were on an unsustainable path in San Francisco proper in particular. Yeah. It was just getting so insanely expensive. The homeless problem, just really, really bad. It just was feeling like something needed to change. this is a catalyst for that change. It's an unfortunate catalyst, but it is going to change things.

I think you'll see conversions of space. I think you'll probably see more residential created out of office. They could figure out how to do that in a practical way. I think you'll see a dramatic reset in some of the newer construction that was pretty expensive, but I think you'll have a lot less demand for. I don't see any other explanation. or predictions to, you know, what can transpire besides that. It's really interesting the way you say it, like this permanent reset, when a crisis happens,

the consequence of a crisis cannot be underestimated. Because when this type of thing happens, you could have, as you're saying, it was becoming unsustainable. So if a pond and like a Darwin, you know, if Darwin was looking at a pond and, you know, there were too many fish in the pond and not enough food, and then all, all of a sudden the food runs out one day, you know what happens. Like, you get an ecological collapse, and that's what we feel like we're on the precipice of. But when that happens, then there's all these spaces available.

And, you know, artists are like, I'll give you $1,000 for this place to start painting in here. So that's what's interesting, right? I long-term and bullish on it, but I think there'll be a lot because it is such a wonderful place in many respects. But I think to some degree, San Francisco is losing its soul. it was becoming those artists you speak of used to live in the mission yeah yeah used to live south the market then they moved to oakland now they can't afford to live in oakland so they've moved out to the far far east bay yeah south it's just being squeezed out and so it just you know so a lot of the things that made san francisco awesome yeah uh left and and and so i think what you will

see is kind of a, my sense is if there is a significant downturn there, you're right. People, you know, people will move back when they could afford to and it will be reborn in some way we can't necessarily describe yet. It'll be different than it was. Yeah. But my sense is the place will ultimately find its own vibrancy again, but it will probably be less corporate and perhaps a little bit more interesting. Yeah, I mean, I watched it happen in New York when I went to school in the late 80s in Manhattan, watching what happened at the East Village and the West Side Highway in that area. I mean, these areas were empty, and I paid, you know, $1,600 a month for my loft to live

illegally in a commercial space, and then you just paid the guy cash in an envelope and you were good. And like, lease, whatever, lease, like, yeah, we signed some lease or whatever. but literally the electricity came from the hallway lights. They would just run an illegal electrical from the hallway light into your apartment. I'm sorry, your photo studio. And you could, you just didn't pay you, I said to the guy, I said, you know, how do I get con ed? And he goes, well, you can play con ed or you can pay my ed. And I said, what you're ready?

So that's how I pay for my kid's school? Which is cheaper. And he said, yeah. I said, how does it work? He goes, well, you just pay me like once a year, 500 bucks. And, or you can get your own. And I was like, okay, got it. it was like a very interesting approach.

That's an entrepreneur. That's an entrepreneur. But I do think that's what's going to happen. I think the other thing you're saying is the rezoning of stuff is going to be critical because everybody was making commercial space thinking, well, Twitter needs space. They need employees. Uber needs space. They have employees.

Airbnb needs space. They have so many employees. And now they're like work from home. We're going to save that money. We'll have like a little clubhouse here. That's how one founder described it to me. Like our, you know, 20,000 square feet is now a clubhouse. and maybe we'll rent 10,000

and the other 10,000 will just be a clubhouse for employees to come in if they want. Our office in Oakland, we've got about 12,000 square feet. We were negotiating to take the floor below us and double our footprint and right before this. But now we're going to survive

in our current space indefinitely. And then 80% of our people or more would like to work from home permanently. All right, Gary, let's make some money here. You and I, two smart guys, right? We've been at this for a little while. We've got some chip stacks. What do we do here?

San Francisco is bottoming out. What's the investment opportunity? If we do believe that spaces are going to convert and we do believe that there's going to be a reset, how do we, how do we play this? What do we buy? I think it's early. It's too early. It takes two years. I don't think prices have reset.

They haven't reset yet. So I think you wait a little bit and I think you'll see some distress in some distressed sellers in office in hotels. restaurants I think it's such a great food town but very, very difficult to operate today. So my sense is there's going to be some amazing opportunities to buy restaurant spaces that eventually will come back and be very vibrant. But again, it's too early. What does the bottom take typically? What did it take in 2008 for like these things to bottom out?

And why does it take a while to bottom out? Well, 2007 to 2011 was historic in its own way. It took five, it was five years. Wow. The price declines in housing. Now, the stock market obviously bounced back sooner and commercial actually came back sooner, but housing declined for five years in a row. That had never happened. There had never been a national decline in prices, home prices, in recorded history before that year, before it started in around 2017. but that was a credit bubble and then you had this massive supply of homes that had been gone through foreclosure and no demand and so you had to eat through all that inventory so i i don't see that

happening today in housing because there is it's it's not a credit bubble it's very different and people are valuing their housing so dearly now and there's professional institutional money that's standing by to buy homes if they drop much in price because they could rent them out and make a yield. And there's no yield anywhere in the world. So if you could generate four, five, six percent return unlevered on buying houses and have some protection, I think that will form a bottom in many segments of the housing market that didn't exist before during the last downturn. There was no institutional bid. That's interesting. So because there's no yield in other places. And there's one of the reasons people are going to the stock market, right? Like,

and it might be overpriced because people don't want to hold cash while we're printing it, like, you know, insanely at a staggering rate. But if you, if you have this institutional money on the sidelines who can buy and then rent the homes, yeah, they're going to get, they might beat other places where they can keep their cash. That's right. Do you want to buy fixed income? That's your alternative. Treasury's, yeah. Yeah, no. Bonds. Yeah.

Scary. Yeah. Exactly. It's interesting. What do you think happens in terms of young people who could never afford to buy homes? Or maybe weren't as interested in them, this millennial generation. At this point in time, you have these millennials who maybe weren't interested in owning homes. But then maybe we're starting to think about, you know, they're starting to trade on Robin Hood, maybe grown up a little bit.

And then they get hit. with a sick pandemic that kind of after, you know, maybe not even having the ability to participate in home ownership because their parents, you know, did all, you know, bought up all the inventory. So what happens to this next generation, do you think? Do you think about that ever? All the time. We have a lot of millennial clients. So I think over half of our clients are between sort of 25 and 35. Really? Yeah.

When you think about our registered users, and then another big chunk is 35 to 45. So it tends to skew younger, and 93% of our homes are sold to people who are buying out of state, and about 75% are first-time real estate investors. So what we're seeing is a lot of millennials, getting on the property ownership bandwagon where they don't live. And it's been a phenomenon of renting in an expensive city

and buying these less expensive homes all over the country to start to build a portfolio, build some passive income and some exposure. What I'm seeing now is a lot of those people thinking about moving to places they might have bought a rental home and say, oh, my God, I bought this rental home in Pittsburgh. And it's, you know, and it's dope. Yes.

And I could go buy a home for $200,000 that is really nice. And I could work out of there. I think a lot of people are going back to be near family or near places they might be familiar with. And they're discovering that they can have an amazing life just because the financial burden is so much less. And they get more space. And so it's a whole different pace.

So I think you're going to continue to see. the migration of younger people going to these secondary cities like the Pittsburghs or the Nashvilles or the Cincinnati's of the world, Kansas City, St. Louis, where you can go and have a great life and do your job. But I do think that millennials like real estate and based on our research, they trust a real estate investment a lot more than they trust the stock market. The trust in the stock market is generally inversely proportional to your age. So it's fascinating. That makes sense to me because if you look at the stock market over multiple decades, you feel very comfortable with it. But if you're only been an adult for half a decade or one decade, it's kind of hard to

understand. I know I didn't get a full appreciation for it until after the dot-com bust. And when I had my second decade as an adult, when I was in my 30s or 40s, I was like, oh, stocks go up, but they also go down, but they overall go up. And they go up faster than other things. So you really want to have a blended portfolio. I hate to stereotype, but, you know, as a generation, one might say that they have a little ADD, right? Having, wanting this immediate result, just everyone's used to having stuff on demand. And so the idea that, yeah, over the next 20 or 30 years, you can count with, you know, pretty great degree of certainty.

The stock market's going to be significantly higher, but it may be really volatile and may go down 20%. That's not something, that's sort of horizon, I think, is hard for a lot of younger people. But people don't realize about that ADD thing, my friend Doug Rushkoff, the media theorist, he thought. thought ADHD was something our generation, Gen X, had as a defense mechanism or adaptation to MTV and video games and screens just moving faster and faster, right? So we kind of got trained to think on our feet, move around a little bit more. And that's obviously continued with the smartphone generation. So therefore, that adaptation allows you to be less tied to one thing and you get more exposure to many things and you get more reps. So we thought staying in a job,

I don't know, you're, you're Gen X like me, I think. We thought you had to stay in a job a minimum of four years. If it was less than four years, it was like a blemish on your resume. And now you see, you know, this generation's like, yeah, I stayed there four months because it wasn't right for me. I wasn't going to suffer for another three and a half years. Fuck that. Like, I'm out. And so that actually gives them, if they're screwing around with sports betting and then doing Robin Hood or betting on crypto or betting on housing, they're going to get so many reps that they're going to become good at it quickly.

because most old people are just like, I don't know anything about housing. I don't know anything about crypto. I don't have a stock market. I only know this. Yeah, it's an interesting insight and perspective, more reps. I think that's right. I think a lot of times people are looking at a portfolio career today, not a job. People are doing lots of side hustles and investing in different things, trying different

things and moving around to a lot of jobs. I think you're right. I do think it's not always constructive when it comes to the career side because I think sometimes the first six months to 12 months in a job, it really, you're just learning and you're not generally all that effective. And then that next kind of two, three years, you could really crush it. And I think a lot of times people will give up too quickly and move for a title or move to another hot company. And they think they're progressing. And they may be progressing in title, but maybe not in skills and actual kind of a portfolio of work. And I think at some point

that catches up with a lot of people. And they find themselves at a level where they're actually not as competent as they would have been had they stayed. Because it takes you time to build relationships and trust, learn the business. So that's one bit of counsel I just have for younger people I talk to is think about the negative of that hopping around is you've got this kind of built in equity and I'm not talking about the financial equity you're building, but the social equity that you're building in your organization. And then you start to increasingly become more valuable and learn and learn after that kind of first year. I always tell people when they're coming to work for me. I expect four years. And are you prepared to do that? And here's the value of

that is you're going to get unbelievable opportunities and exposure. So we'll just keep pushing stuff on your plate. And for me, it's sort of like what you're saying. I think when your boss and the and management trust you, you've now achieved like the really important thing, which is the next time something important comes along, they go, who did the last two important things? And how did that turn out? Oh, yeah, that kid who's been with this 18 months. Let's give him this really big important thing that would be career changing for him. So you have a personal story. So first time I applied to business school, I just applied to Stanford, did not get in. I had two years of work experience. My boss said at the time, he goes, listen, you work for me for another year.

I'll give you two projects to run. You've proven yourself and reapply based on that additional experience. I got so much more experience in that third year than I did in the first two. I actually got to lead a couple projects, and I got in. So I ended up going to Stanford. And I could have gone to another school with two years of work experience if I was in a hurry to just go to business school. But that is kind of my point.

I learned so much more in that third year because I actually reasonably competent, and it built up enough internal trust to do that. All right. Listen, continue success. Oh, the one thing I was going to say is what's the minimum investment? Because we at the syndicate.com, which is only for accredited investors, at this time, the accreditation laws might change, as you probably are well aware. We make the minimum 2K per deal, or we try to, depending on the deal size we're doing for angel investing,

which is super high-risk. It's an opposite of what you're doing. but that's because we want people to be able to learn by making the smallest investment possible and get reps in as I was talking about before making big bets. What's the minimum people were able to put into that last thing? I forgot what you called. Yeah, roofstock one. Roof stock one, yeah.

Yeah, so in the first iteration of the program, it was about $5,000. Oh, wow. We sold 10th shares of homes that were 50 to 60 percent leverage. So, yeah, it was about $5,000. That's great. But it was only accredited investors, yeah? That's only accredited, but as you've mentioned, we're looking at ways to open it up over time to everyone. But for now, we're focusing, as you are on the accredited piece.

Now, you don't have to be accredited by houses, and we do have people who are forming little syndicates, almost like an angelist group, LLC, and buying homes. Yeah, SPVs. You can buy, with leverage, you can buy a home. And so that's a way that non-accredited people can start to dip their toe in the water. It's really interesting. I had the founder of Masterworks on, which is doing what we're both doing, but in art. We had the founder of Rally Road on who's doing it for collectibles, cars, et cetera.

You're doing it for homes and I'm doing it for startups. And I'm trying to think if I left anybody out of this party who's also doing it. I saw one that's doing it for like comic books or something or baseball cards, but I think Raleigh Road's going to be in that. So the four of us are each doing this, but in a different vertical, the four of us should form like a little what do they call like YPO or like a mastermind group where we just trade notes on what we're doing no it's a great really interesting yeah we've compared notes with the guys at rally road about their structure and you know I listen to your your podcast and learn a little bit about the art market that was really cool too

but yeah I'd love to do that I would love to wear notes there are definitely some common al Well, the one I find that's the most interesting is educating the participants in the syndicate. Do you provide education for people when they, when they, yeah, in what form? We talk academy you can go to and we've got a lot of stuff on our site for free. And then we have sort of a, you could actually sign up for the academy and get a lot of proprietary content and personalized coaching and stuff as well. So I would encourage people to go if they're interested in learning more. and our site's free to use. So a lot of people just get on and there's a lot of information on there if you want to learn about

real estate investing. See, I think that that's the big win because the more you educate people and the better decisions they make, the better the community will be. And then that becomes this crazy advantage. For example, if you help educate people and then somebody says, you know what, I live in Arizona and I see that this neighborhood's doing really good. And this coffee shop, I heard from a friend, is opening up over here. and that's the HIPTA coffee shop and the donut shop is also moving over there,

then they could signal you that, hey, there's an opportunity there, and then you've got a real flywheel going, right? 100%. Yeah, that's what happened for me. We have people send us deals now at the syndicate, and they say, hey, you know, I have a really great deal. We saved a just slice, and sort of the flywheel gets going where the community is bringing us deals now, and then we're re-sindicating them out to the community.

now that we're now seeing the same thing happening people bringing us houses even real estate agents bringing us houses before they didn't they didn't know about us and they didn't know how to sell least homes so or people bringing us their own home and say hey can you wrap this in the roofstock one structure and fractalize it and let me keep some of it and sell off some of it so all this stuff starts happening once you as you say start to build that community and people come up with all sorts of interesting alternative use cases for it which is which is pretty cool If one of you, I'll end on this, if one of your best friends, your best friend, not even one of them, your absolute best friend came to and said, hey, I got money, I want to invest in, you know, a property. What are the top three cities I should look at in terms of appreciation? I'm looking for like a 10, 20 year appreciation window. I'm 40 and I want to get this money out when I'm 60 and my kids go to school. What three cities would you tell them might have the chances of the most appreciation? Yeah, that's a tricky one.

You know, I personally am very bullish on Austin for lots of reasons. I think you continue to see a lot of in-migration there. And I think there's a lot to like about Phoenix as well over the long term. Even though there is an awful lot of land there, that's the one thing I do worry about a little bit with Phoenix. But there's pretty diversified job base there as well. And then, you know, I think you think about, I also personally am bullish on Atlanta long term. Because I think it's when you look at the southeast and a major kind of employment hub that has high quality life, great airlifts, still very low cost.

I think those are all interesting cities and those are all pretty popular today with investors, I think, for good reason. but I think all good long-term plays. Awesome. Yeah, Austin would have been on my list for sure, but not Atlanta. I wasn't aware of that. I know people say Nashville and Florida. Nashville's great, too. I love Nashville. It's run up quite a bit. So the yields are definitely lower than you see in Atlanta. But I am bullish on Nashville as well. That would be in my top probably five. Awesome. All right. Listen, continue success. Everybody go check out roostock.com.

All right. We'll see you all next time on this week's start. Bye-bye. Thank you.