Roofstock Review: Invest in Single Family Homes Anywhere in the US Easily

by David Ning · 4 comments

I’ve thought long and hard about dabbling in real estate as a way to diversify my investments. With stock market valuations at a dizzying high and my assets growing to a comfortable level, owning physical structures with a separate and good chance of dependable income just feels right for me. I even went as far as seeing a few properties with an agent, but negative thoughts started making me hesitant with the purchase. What if I get that one bad tenant who complains about every little issue and calls you in the middle of the night just to fix easily fixable issues? Or worst, what if the tenant refuses to pay rent and refuses to move out? I consider myself decently intelligent but I’m a novice in tenant selection and one mistake can wipe up years of returns. Even if I’m able to find good tenants, managing them and overseeing repairs is a part time job at the very least, and more work just doesn’t appeal to me.

The other, perhaps more rational reason, is that I live in Southern California. The cash flow of real estate investments are extremely low in this neck of the woods. Annual gross rents typically range in the 4%, maybe 5% range, and that doesn’t even including property taxes, repairs, tenant turnovers and other expenses. Add those in and you’d be lucky to break even. Investors here usually subscribe to the greater fool’s theory in that they can still make a killing on their investments as long as another investor (fool) buys their property at a much higher price. In other words, you don’t need to care about cash flow here because there’s always price appreciation.

The issue is even worst with commercial properties. I looked at a strip mall once to see how much those properties sell for and the yield was expected to be 1% based on the seller’s asking price. ONE PERCENT! Who in the right mind would buy something like that?

Enter Roofstock

My hesitancy with property investments must be a common issue, because Roofstock, Inc. created a platform to deal with the exact obstacles that are preventing me from jumping in with both feet. What they did was create a marketplace that connects buyers who want to buy residential properties with sellers who own such properties. The company also handles the whole transaction, eliminating the need for agents. At Roofstock.com, anyone can view out of state property investments that have been inspected through Roofstock’s certification process. The website also provides quite a bit of data for a potential buyer to analyze the financials of the investment before making an offer for the property. The kicker is that properties in the platform already has a rent paying tenant, meaning there’s cash flow on day one.

What About Repairs

Roofstock is marketing their properties as a type of passive investment, so they’ve partnered with multiple property management companies in each local market to help you deal with tenant related issues. For those who aren’t familiar with the details, a property management company will help you screen tenants and deal with repairs. These companies will take a cut off each rent check plus the direct repair expenses that the property requires. They will also charge a fee to place a tenant in the property if you were to need a new tenant down the road, say if the current tenant were to move out.

Let’s Look at an Example


Here’s a single family home for sell at Roofstock.com in McDonough, GA with a tenant paying $1,500 a month currently and the seller is asking for $195,000 for the property. A quick calculation (and you can also click on the Gross Yield wording to get the number if you were in their platform) shows that gross yield is 9.2% and the estimated cap rate is going to be 4.7% after factoring in 46.5% of expenses with the breakdown as follows:

  • Property Management – 8.0%
  • Leasing Commissions – 2.6%
  • Taxes / HOA / Insurance – 27.6%
  • Repair & Maintenance / CapEx – 8.2%
  • Total – 46.5% (excuse the rounding error because the above add up to 46.4%)

What I like here, other than the fact that Roofstock tries to make the numbers clear, is that they don’t try to sugar coat the potential return. The 4.7% cap rate the first year includes a 5% vacancy, which is possible but also may prove conservative because there’s already a paying tenant in the property. Ditto with leasing commissions. Of course, the estimated market rent on the property is 3.3% higher than the rent the owner is paying now so you may actually want them to move out.

The cash flow in the first year is estimated to be $124 with an initial investment of $53,625. This is assuming you pay 25% down on the property, pay 1.5% in closing costs to get a loan to pay for the rest at an interest rate of 4.625%. I was a little disappointed at how little I would receive in year one but I dug into the numbers a little more and realized that the loan payments overwhelm the rent you receive at the beginning. Subsequent years looks much better because cash flow jumps to $437 in year 2, $760 in year 3, $1,093 in year 4 and $1,437 in year 5, assuming rent growth of 3.0%.

You can manage the property yourself and save more than 10% of expenses, but this won’t work if you are living far away.

You can also pay cash for the property. You wouldn’t need to pay the roughly 1% of closing cost for the loan, but you still have to pay Roofstock 0.5% to buy the property for a total initial investment of $195,975. However, cash flow is $9,147 in year one because you no longer have to pay debt payments.

To Me, Appreciation is Just Icing on the Cake

I look at investing in single family homes mainly as a “buy and hold provide income for decades to come” type investments, but many people care about the total return. Knowing the number interests me too because maybe I will need money in 10 years and want to sell my properties. With the home we looked at, an investor is looking at an estimated 9% annualize net return in 5 years based on getting that loan we talked about with a 2.4% annual appreciation. The appreciation number is based on the past 20 year history. For kicks, I changed the appreciation to equal last year’s price increase of 7.4% and got a 20.6% annualized net return in five years. I plan to tell Warren Buffett about my investment strategies when I have lunch with him then. After all I think he’s just managed just shy of 20% per year in his investing career. Ahh it’s good to dream.

Can I Be Comfortable Buying a Property So Far Away from Where I Live?


Buying a property that isn’t tied to the local economy is awesome because it offers additional diversification benefits. You don’t want your investments to be crashing if there’s a hiccup with the economy where you work. Plus you already likely own a primary residence there so that can be a triple whammy.

The only problem is that there’s no way I would buy a property far away from me through an agent, because you are likely going to buy the home sight unseen and you can never really trust an individual you’ve barely met who is being paid for you to transact.

A service like Roofstock changes the game though. You can have more confidence with a company that specializes in certain markets because their reputation are also on the line for any properties that they sell. Roofstock understands this, and that’s why they certify every property they list. They also provide a diligence vault publicly to anyone that signs up for a free account that includes documents such as property valuation, inspection, title report, HOA CC&Rs, a preliminary insurance quote, and tenant payment history.

Additionally, they have reports on the local market in general as well as a neighborhood score and surrounding school ratings for those who are interested in those metrics.

How Does Roofstock Handle the Transaction


Sellers submit their listing to Roofstock, and the company will go through their certification process, check that the title is clean, comb through the HOA CC&Rs for problems, inspect the property, value the property and find out the estimated the current market rent. Roofstock will also take pictures of the inside and outside of the property, construct a 3D model of the place and offer it to potential buyers on the website. Sellers will pay a fee of 2.5% when the home is sold, which is much less than 6% they typically have to pay in standard real estate transactions. And because they are selling the home with tenant in place, they also get to collect the rent all while the home is being marketed on Roofstock’s platform.

Once the buyer submits the bid, then it becomes just like any standard transaction. The seller will review the bid and once the terms are accepted, then the standard 30 day escrow gets underway for the buyer to line up financing and buy the property. As mentioned, the buyer will pay 0.5% to Roofstock and for that fee, you get a rent paying tenant right away, help with choosing from a list of vetted property management companies and the ability to buy an out-of- state property without ever needing to set foot there.

What Happens After You Sign Up?

Expect an advisor to give you a call soon after you sign up for a free account to learn about your goals and answer any questions you may have about the platform. She can also help you screen through the listings to find the ones that fit your objective and guide you through closing.

What Do You Think?

Learning about the platform gets my idea juices flowing again. I like how multiple points of this process needs to fail before my investment fails with this approach. I doubt Roofstock is in this to scam investors and make a quick buck, but I’m buying an actual property here, meaning that I still own the asset no matter what happens to any company I partner with. The fact that local reputable property management companies are partnering with Roofstock also speaks volumes about the validity of the assets themselves. After all, these companies won’t get paid if the properties can’t attract renters.

I love the streamline process of being able to locate, analyze and buy properties far away from where I live. In fact, buying a property through Roofstock is going to be simpler than buying my own primary residence because everything is streamlined and done online.

I may just have to give investing in one of these properties a shot. Here’s Roofstock’s own FAQ if you want to learn more, but what do you think? Should I plow some money into this?

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{ read the comments below or add one }

  • I so much like the fact that FHA loans are made affordable to low income individuals. The only thing is that it is not available for investment purposes

  • Richard Sauer says:

    The beauty of owning rental properties lies in the long term returns when you couple the investment with leverage. Just look at that first year with almost no cash flow but then things just ramp up from there. Ever growing rents really are a thing of beauty.

  • Money Mike says:

    This sounds like a no-brainer for the seller since the commissions are so much lower. Plus, they can start marketing the property for sale without kicking the tenant out.

    I’ll definitely keep these guys in mind when I’m ready to unload my properties in the future…

  • Shannon says:

    Wait… so are you saying that you are actually buying a real house here and you own it 100% as if you found a local agent and bought it through the standard real estate transaction?

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