Contenders (6 out of 10 stars)
Review and Ranking
What is Roofstock One?
Note: this is a review of the newer Roofstock One platform. Click here for information on the older/original Roof Stock offering.
IMPORTANT COVID-19 UPDATE: this info was posted before anyone knew we would be facing a global pandemic in the spring of 2020. So it may be missing crucial information necessary to making an effective investment today. Some of the information in it may be dated, no longer accurate and/or irrelevant. For information on analyzing investments in this new era, see: "How will Covid-19 / Coronavirus Affect my Alternative Investment Portfolio?"
Roofstock One is the latest residential real estate product from Roofstock and was launched in February 2019.
An investor in Roofstock One has the option to purchase a small portion of a rental property (versus having to pay for the whole thing in the original RoofStock). This is nice because an investor can get in at a much lower minimum.
And another great improvement is that investors no longer have to take on the huge burden of the loan themselves (like they did with the original). This greatly reduces investor risk and hassle. This is a standard feature on other crowdfunding sites, and is a good to see here.
And the debt itself is at a moderate 50-60% LTV which many moderate investors will probably like.
Roofstock One also puts their own money on the line with 10% skin in the game. (Although this is only guaranteed for one year, which is arguably too brief to know if the investment is going to truly hit its projected numbers or not).
The investor also has the ability to liquidate in six months. But this is limited by requiring the investor to know the person who will purchase from them, or through a non-guaranteed redemption scheme that Roofstock One may not be setting aside explicit reserves for (unlike competitors).
On the minus side: bankruptcy protection is incomplete and there is no audit (which is unusual for a firm that claims $1 billion in transactions).
Also certain information vital to managing crucial cost overruns seems to be missing. Additionally lack of transparency on performance, medium-term debt, limited time-span skin in the game and certain legal and financial structures may cause small to large concerns for others.
(More on this and other items in "What are the Roofstock One Pros and Cons" below).
How does Roofstock One work?
RoofStock One sources properties from the same channels as the original Roofstock platform. It then designates a smaller subset of these for Roofstock One.
Each property is split into 10 portions (or "shares") which an investor can purchase. Note that the investor does not actually own the property but owns "economic rights" to the distributions, tax depreciation and capital appreciation.
As of the time of this review there are only 8 properties available in Georgia, Indiana and Texas. Current projected 1st year income distribution ranges from 5.6% - 6.7%.
The total projected return ranges from 10.7% to 12.2%. The calculation of this may seem a bit strange to some. On one hand, Roofstock claims their intention is to hold the properties indefinitely. On the other, the total projected return includes a substantial hypothetical profit from selling in five years. If they truly hold indefinitely than the total projected return would almost certainly be substantially less than shown.
Many experts say it's isn't possible to accurately predict what home prices might be 1 year from now (let alone 5 years in the future). So even if RoofStock One does sell, the more experienced investors may choose to take the accuracy of the price projections with a grain of salt. These may also wish to focus more on the income portion of the total return which tends to be less volatile and is easier to predict.
Debt currently ranges from 50 to 60% of the home price. This is fairly moderate compared to a aggressive deals which might load up the debt from 65% to 80%. So I thikn this is good to see.
This isn't a site for a very conservative investor (like me) who likes to put zero debt on properties. (See "Deep Dive Review of My 7 Figure Real Estate Portfolio"). But, there aren't a lot of people that conservative. So I suspect that the range of debt on Roofstock One will be appealing to many.
Roofstock One makes money by charging an asset management fee (0.5% of the property price per year and prorated based on the collected rent).
The explanation of the fee in the contract is one of the most complicated I've ever seen. Usually it stated as a single number or single sentence. Roofstock One presents it as several paragraphs. (And also includes rental revenue, which incidentally is not mentioned in the FAQ as a part of the fee calculation). The wording was so complicated I couldn't make heads or tails of it myself. So I asked their investor relations for an explanation. Here is what I got as an official answer:
“The asset management fee is initially set at 0.5% of the home price or interest price (inclusive of any amounts financed with leverage but exclusive of any initial reserve payments), calculated on an annual basis and applied in equal parts across each quarter. For example, the asset management fee for a $100,000 home equals 0.5% x $100,000 = $500 per year and $125 per quarter. The fee adjusts at the same rate as the change in gross rent and, like the property management fee, may also be adjusted at the discretion of the property manager.”
Roofstock One also makes 10% off of the property management fees, which is done by its wholly-owned property management company, Streetlane PM LLC. This is within the typical range of 8 to 12% and looks fine to me.
On top of that their broker/dealer and placement agent (North Capitol) can charge a transaction fee up to 0.70% of the investment price.
What are Roofstock One Pros and Cons?
Advantages: Cheaper to purchase a portion of a property rather than the whole thing, no need to get a loan like Roofstock original, 10% skin in the game (for 1st year), claims ability to possibly liquidate after six months (although perhaps with some significant exceptions and also possible 7.5% redemption fee), ability to unwrap the investment (take it over from RoofstockOne) if you own at least nine shares and are willing to pay all the debt, fees expenses, etc., moderate debt at 50 to 60%
Disadvantages: Incomplete bankruptcy protection, no audit, no information to verify the likelihood of one of the biggest cost overruns (unexpected capital expenditures), legal risk of contagion, no track record of success and doesn't provide transparency into the performance of current deals, medium-term debt (five-year) has refinance risk for a true "indefinite hold", no depreciation acceleration and does not provide depreciation projections, another investor can unwrap the property against your will and take control of it, no 1031 exchange option like with the original market.
The biggest advantage of Roofstock One over Roofstock (original) is the ability to purchase a portion of a property rather than the whole thing. So rather than paying $160,000 for one property, an investor can get into 10 properties at $16,000 each. Investing this way can be much safer because of the increased diversification across investments and geography.
Also, unlike Roofstock (original), the investor does not have to get their own loan. This can substantially reduce the hassle factor as well as the risk (since the investor isn't personally responsible for repaying all the debt if the deal blows up).
Both of the above factors make Roofstock One much more inline and competitive with traditional crowdfunding sites that typically offer both of these features.
Another nice feature is that they put 10% skin in the game, by owning 10% of the investment. Unfortunately they only commit to doing this for a year. That's most likely too soon to tell if the biggest part of the projections (price appreciation, capital expenditures, repairs, etc.) were right or not. I would love to see them change this and commit to holding that 10% for the entirety of the investment to make it true skin in the game.
Another potential perk is that investors have the right to sell their shares after six months to another investor. While single-family houses are generally very liquid, it usually takes time to sell them off (anywhere from a few weeks to a few months). So, in theory, this seems like a nice feature.
However, in practice, Roofstock doesn't have a marketplace to make this happen. So currently an investor would need to happen to know another accredited investor willing to buy from them. This may be a major limitation that makes this feature unusable for most investors.
As an alternative, Roofstock offers the potential ability to sell to Roofstock itself after paying a 7.5% redemption fee. This price seems reasonable to me, considering that selling a property on your own involves paying broker fees that often would be a similar price.
On the other hand, Roofstock reserves the right to refuse to do this (and for any reason whatsoever). And they have not specified on their website that they have committed to holding any specific amount of reserves (or liquid assets) to provide this liquidity.
Further, they are startup company, which are generally known for burning up a lot of cash, and having a much statistically higher chance of going bankrupt (versus established companies). So it may be an open question as to whether an investor can expect to take advantage of this feature at any particular time in the next five years (let alone "indefinitely" in the future).
In comparison, funds like Broadstone's BDREX and Blackrock BREIT commit to put at least 20% of the investment into liquid securities to guarantee they can provide a certain minimum amount of liquidity.
So if Roofstock One is going to continue marketing the liquidity as a positive feature of this investment, I would personally like to see them similarly commit to making a certain amount of reserves available for liquidity.
Another possible advantage of Roofstock One is called "unwrapping". If at least 90% of investors in a property want to leave Roofstock One, they can do so. This is not free and requires paying Roofstock some penalty fees (the amount of which was not immediately clear to me after reading the contract). I have asked for clarification but not received it yet. So anyone interested in this would want to follow up further. It also requires paying off the debt and any other liabilities as well, which makes sense to me.
On the minus side, the site has incomplete bankruptcy protection. Full bankruptcy protection requires specifying a backup administrator in advance or giving shareholders the right to vote on a new administrator if a bankruptcy occurs. Roofstock One doesn't do either of these things. So it's possible that if the platform goes bankrupt, investments themselves could end up without a manager and be left in limbo. Hopefully Roofstock will consider fixing this in the future.
There is also no audit which is unusual for a company claiming $1 billion of transactions.
Roofstock One discloses that it uses an unusual legal structure (series LLC) and that there is a risk of contagion (i.e. the house you picked does perfectly fine but you lose money anyway because someone else's didn't.) More about this is discussed in the legal section below: "Is Roofstock One Legal".
Another apparent minus: one of the biggest potential pitfalls of single-family rentals is underestimating big capital expenditures and repairs. This is when you have to replace a big-ticket item (like a roof, AC/heater, appliances etc.) or do major repairs (like plumbing or electrical work). If you underestimate the cost, you can end up seriously under-performing. And in a severe case an investor could default on the debt and lose some or all of their investment).
Roofstock claims that they check the properties beforehand for major problems and fix them. In theory this sounds great. In practice there appears to be no way to verify if they are doing this or not on any particular property (and how well). That's because these details don't seem to be provided.
Since this is such a major issue, I would personally like to see them provide the year and condition of every major component (as well as a copy of the inspection report which I would expect to be from a neutral, third-party inspector).
Roofstock One also allocates about 1 to 3% reserves for repair items going forward. Some may think this is fine. I find in my own personal rental properties I typically allocate on average 4% just for repairs. Then I allocate an additional amount for the expensive capital expenditures, after doing a detailed forecast of when they are expected to break down and what it will cost.
I am a conservative investor, so some might feel that what I do, is too much. From my point of view, the RoofstockOne numbers may be too aggressive. If Roofstock One properties are really intended to be held "indefinitely", then this could end up becoming a significant shortfall for investors. Another investor might be fine with this set up.
Another potential issue for conservative investors is that RoofstockOne has only been doing this since February 2019. So they do not have a long track record of successfully forecasting the key things in these deals (capital expenditures, repairs, rental income, price appreciation etc.). And further, they do not provide any visibility into the performance of the deals that they do have. In my opinion, the former is a potentially a significant risk and so they should at least provide the latter.
Another potential issue for conservative, long-term investors may be the medium-term (5 year) debt. If interest rates go up significantly in that time, the next loan may be much more expensive which would greatly reduce profits. And if we have another great recession, banks may stop loaning entirely (like during the last recession). If that happens when this needs to renew, an investor could lose all of their money from the default. Investors who are shorter-term, more aggressive or not concerned about refinance or interest-rate risk will be fine with the above.
Another issue: The downside of the unwrapping feature is that other investors can take control of the investment against your will and remove it from RoofStock. Since that requires a 90% minimum to do, an investor concerned about this may wish to always purchase at least two shares (20%) which would make involuntary unwrapping impossible.
Additionally, for some reason Roofstock says that they don't accelerate depreciation. This is one of the standard techniques used in real estate investing which normally allows potentially massive tax savings to those who know how to use it (See "How to Invest in Passive Real Estate Without Paying a Penny of Tax (Legally): Part 3: The Power of "Passive-Pairing").
So, this may be disappointing to more experienced investors.
They also say they cannot project the depreciation savings which is unusual for an experienced sponsor to say.
Finally, unlike the original Roofstock there is no 1031 exchange option with Roofstock One.
For more raw data on the site (including investor and sponsor fees, legal structure etc.), or to easily compare it with the data of competitors, see the feature by feature comparison matrix.
Is Investing In Roofstock One Legal?
Roofstock One appears to market to investors under 506C. If accurate, this means that it's only available to accredited investors. And since it is not using 506B, new investors are able to view investments immediately and there's no 30-day waiting period or mandatory phone call like on some sites. 506c investments also requires investors to prove their accredited status (and update it periodically).
Unlike some competitors, Roofstock One doesn't spin up a new LLC for each investment. Instead they are in a single Delaware trust and each property is a new "series" in the trust. This is slightly cheaper for Roofstock One, but introduces additional risks of the investor.
The Roofstock One legal disclosures warn that a court could rule that these are actually all the same entity. If that happens, the investor could be exposed "contagion" from unrelated investments. In other words, even if their own property does fine, an investor could end up losing some or all of their money because several other properties collapsed/got foreclosed on/were sued, etc..
Personally I would like to see RoofstockOne firewall off each investment, like many other platforms do and use a new stand-alone LLC for each one.
What does a Roofstock One deal look like?
Normally this is where I do a step-by-step due-diligence on a random investment (through my lens is avery conservative investo). I am not a financial advisor or accountant, and this is just my personal opinion.
However, as I stated in the pros and cons, some of the information that I feel is crucial to evaluate an investment in this asset class is not on the site (or at least I couldn't find it). This includes all of the capital expenditure analysis I typically will do. So I don't feel comfortable doing my usual in-depth review and will skip it here.
If this investment had passed all my initial checks, I would have dived in further to check out the sponsor, the property itself, the projections, etc. To learn how I do those things, check out The Conservative Investors Guide to Due Diligence.
Where can I discuss other Roofstock One deals?
You can do this with thousands of other investors in the private investor club. While the club is free, membership is restricted to investors who have no business connections to sponsors or platforms. Also, all members must agree to keep all club info confidential by signing a nondisclosure agreement. Click here to join or get more info.
Who are Roofstock One Competitors?
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Code of Ethics: To maintain objectivity, I do not accept any money from any sponsor or platform for anything (including affiliate ads, advertising etc.). See code of ethics for more.
Personal opinion only: All info is my personal opinion only as an investor. I am not a registered financial advisor, attorney or accountant. Always do your own due diligence and consult with your own licensed professionals before making any investment decision. Information is believed to be correct but may have errors, so use at your own risk. If you find an error, please let me know.
Rankings/rating are general: In my opinion, every investor comes from a different risk tolerance and financial situation, so there's no such thing as a single investment or platform that's great for everyone. There are many deals that aggressive investors love, which I won't touch, and vice versa. And every investor has their own way of doing due diligence. I believe there's no one right way to do it.
So, the site rankings/ratings are based on criteria which I feel are important to the broadest range of investors (transparency, volume, bankruptcy protection, etc). And even though I have my own personal, conservative, due diligence method (and talk about how the site's deals measure up in the "deep dive section"), I don't use my personal criteria as a factor in the rankings. So for example, a high ranking/rating doesn't mean that I would personally invest in a site (and vice versa). Click here to see what's in my own portfolio.
About Ian Ippolito
Ian Ippolito is an investor and serial entrepreneur. He has been interviewed by the Wall Street Journal, Business Week, Forbes, TIME, Fast Company, TechCrunch, CBS News, FOX News, USA Today, Bloomberg News, Realtor.com, CoStar News, Curbed and more.
Ian was impressed by the potential of real estate crowdfunding, but frustrated by the lack of quality site reviews and investment analysis. He created The Real Estate Crowdfunding Review to fill that gap.
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