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A yellow, symmetric duplex home with brick chimneys and faded yellow siding.
A typical midwestern duplex, the type of rental property being sold on Roofstock, a platform for buying investment property online.
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Millennials, priced out of homes locally, shop for investment properties online

If you can’t afford a house down the block, go online and buy across the nation

For Michael Pickens, a 31-year-old working in tech sales in the Bay Area, buying a home for his family isn’t an option. He lives with his wife and two kids in Campbell, California, the same town where he grew up, in an apartment across the street from the middle school he attended. He’s seen all the signs of an affordability crisis: Friends can’t afford to live in their hometown and have scattered to Texas and Arizona. He’s put in offers on $700,000 condos only to lose out to wealthy buyers making all-cash bids. The 1,100-square-foot house he grew up in, built in 1952 and barely renovated, now costs $1.2 million. Campbell is simply a “different town.” Even if Pickens could afford to buy a single-family home, he isn’t sure it’s worth the financial risk, especially in a downturn.

Pickens is among the many millennials priced out of homeownership in the expensive coastal city where he works. But that doesn’t mean he’s not in the real estate game. To the contrary, he and his wife now own six properties in multiple cities. Thanks to Roofstock, an online platform for buying and selling investment properties in midsize, emerging markets across the country, Pickens can buy buildings from Pittsburgh, Pennsylvania, to Memphis, Tennessee, via his laptop.

“It’s very video game-like, like buying stock,” he says. “I’m physically buying these buildings, and managing property from afar.”

Roofstock, which has overseen more than $1.6 billion in transactions since it was founded in 2015, allows Pickens and other users to choose rental properties with varying degrees of expected returns, based on numerous risk factors, including location and tenant history. (Each listing contains extensive photos and inspection records.) Pickens picked up his first buy, a duplex in Memphis worth $129,000, a year ago, putting 20 percent down. After taxes, management fees—a property manager recommended by Roofstock oversees the building—and the mortgage payment, he makes roughly $200 a month. He’s already picked up five buildings in five other markets and spends less than an hour a week operating his property empire. It’s so easy he compares the process to fantasy football; Roofstock’s 30-day property return policy makes it “like buying a pair of shoes.”

“I’ve never been to the places where our investments are,” Pickens says. “I know nothing about these towns or cities.”

Properties on Roofstock are all vetted, and rated via a number of criteria, including neighborhood ratings.
Roofstock

Making money with the real estate investment cloud

Pickens and others like him remain confident—even after living through the housing crisis and feeling the crunch of rising home prices—that it’s worthwhile to begin climbing the property ladder. And while investors have always picked up out-of-town properties, new technologies make it seem more natural than ever to buy a building on a block you’ve never seen. This technological ease has coincided neatly with larger real estate trends: rising costs in large coastal cities, the increasing appeal of midsize metros, growing interest in the idea of passive income and the cult of FIRE (Financial Independence Retire Early), and cynicism about the investment markets and the long-term fate of social security.

The old adage about real estate is that it’s all about location. That’s still true, but it’s less and less necessary for landlords to live in the same locations as their properties. Smaller cities and rising markets offer the best chances for more consistent monthly returns, and emerging investment platforms offer a channel for capital to flow from the coasts. According to CoreLogic, 11 percent of single-family homes purchased in the U.S. last year were bought by investors, the highest number on record and twice the percentage in 2000.

“We find that millennials see the investment landscape very different than their parents do,” says Alan Lewis, co-founder of DiversyFund, a site that lets users invest in large-scale multifamily developments online, and that controls roughly $100 million in assets. “They’re jaded by the homebuying story, they’ve seen people overpay during the peak and be upside-down in their homes, and they see stock market volatility and don’t have an appetite for it. They want something that offers a departure from the rollercoaster ride.”

These services aim to do just that. Whether they’re buying a stake in a new commercial building through real estate crowdfunding or investing in a unit in a building made for Airbnb, a new generation of investors suddenly has the tools to seize opportunities in dozens of cities. According to Gary Beasley, co-founder of Roofstock, before this era of innovation, roughly 70 percent of rental and investment property was located an hour’s drive or less from where the owner lived. Roofstock users have flipped that formula: Roughly 93 percent of investors on the platform are buying out of state, he says, and 75 percent are first-time buyers. It makes a lot more sense to buy a great home in Cincinnati for $120,000 than gamble on a $1 million starter home in Los Angeles.

“The idea of separating where you live and own has been happening for a while now,” Beasley says. “Since we’ve created the real estate investment cloud, you can plug into it and access opportunities across the country. The country is your oyster.”

Buying the dream home once the dream is gone

Due to the rising number of jobs that allow telecommuting, and the potential to have a career in a creative field even far from a big city, many young investors from places like Brooklyn or Boston are investing in second homes in rural areas. They’re using them not just as traditional vacation homes, but with the goal of turning them into short-term rentals, summer escapes, and eventually primary residences.

Alissa Hessler, a 37-year-old former public relations exec and founder of the Urban Exodus site, did just that, moving from Seattle to a property in coastal Maine and in the process creating her own career, which includes documenting others making similar moves. Today, Hessler and her husband offer creative services “based in Maine, available worldwide.” She works out of an office in a converted barn, and believes more and more of her generation will do the same thing, since rural property ownership, unlike urban property ownership, is still achievable on a creative professional’s income. In addition to dreams of authenticity, farmhouse living, and connecting with nature, a rural house offers a place to park money and actually turn a profit.

“Due to the golden handcuffs of having a high-paying job, people feel trapped in the city,” she says. “There’s also this general discontent from the millennial generation and the one behind it. We’ve always been sold this American dream: go to college, get a degree, move to the city, make a career, and have kids. But it’s just not possible. Cities are just too expensive, and young people are saddled with school debt. I have friends in their mid to late 30s who have multiple roommates.”

A multicolored, restored farmhouse with a mint green roof ringed with a small stone wall.
The Hesslers’ property in rural Maine.
Hessler Creative

Hessler’s work with Urban Exodus argues that it doesn’t have to be that way. Many of the couples she’s interviewed were cautious about the transition, but slowly eased their way toward being totally remote workers.

Hessler warns that those contemplating such a move need to be aware of significant risks, including the high cost of property management services for rental properties (up to 20 to 30 percent of a landlord’s intake) and the price of repairs and utilities. Hessler once had a $2,000-a-month heating bill for her farmhouse before adding adequate insulation, and when a fridge broke, she had to wait three months for the only local repairman to fix it. It’s all part of being in what she calls the “Pop Tart generation”: raised on conveniences, and unfamiliar with the kind of repairs and common-sense skills required to maintain property.

“It’s not as easy as people think,” she says. “I’ve had friends in this scenario dip their toes in the Airbnb market. While 85 percent of guests are amazing, 15 percent are awful. And that 15 percent can push people over the edge.”

Despite those hardships, she still feels like rural property is a good investment. She sees it in the part of mid-coast Maine where she lives: So many young buyers are coming from Portland, Maine; New York; and Boston.

“Maybe I’m being overly optimistic,” she says, “but because of telecommunication, desirable rural communities will become even more desirable. It’s possible to thrive in smaller areas. You can start something yourself; cities take so much investment capital and are so risky.”

A vegetable garden next to the side of an old restored house.
Alissa Hessler in her garden.
Hessler Creative

Investing in the cash-flow generator

While the millennial generation may be jaded due to the Great Recession and skyrocketing housing prices, the idea of investing in real estate is still extremely appealing to many millennials. They just need to find the right inroads.

Riley Adams, who lives in the Bay Area, in Pleasanton, California, and runs the Young and the Invested financial blog, says that real estate is an exceptional investment for multiple reasons. It provides rental income and cash flow, which can be partially shielded from taxation by numerous deductions, as well as relatively consistent returns over time. Adams has his own investment property in New Orleans, a studio condo downtown that cost him $100,000 and makes him roughly $400 per month after costs and mortgage payment are taken into account.

Smaller markets, Adams says, allow for greater monthly income for property owners. In expensive cities, it’s hard to charge enough monthly rent to cover the mortgage and expenses and still make a solid return. In cities such as New Orleans or Des Moines, Iowa, a landlord can charge a competitive rent and make a decent return on a much cheaper home. Pickens found the same thing with his Roofstock investments; he couldn’t find any properties in the Bay Area that provided solid cash flow.

In the major markets in the U.S., most money is made through appreciation of the real estate asset, not monthly cash flow. That’s why there’s so much institutional money in cities like New York or Los Angeles: Big players who can front millions of dollars see steady returns over time, but smaller landlords aren’t able to make the extensive initial investments required.

That’s why Roofstock, which now operates in 65 markets, has focused on properties in the Midwest and Southeast, says Beasley. The company finds that users, many of whom are tech-savvy early adopters, are concentrated in higher-priced cities.

“You can get a lot of house for your money, the rent money is very attractive, and the yield on these properties is pretty nice,” he says.

What about the tenants in these properties? The Roofstock system actually works to their advantage, Beasley argues. Since the new property owners don’t live in the cities where they own these apartments, they tend to hire professional property managers, who often do a much better job than inexperienced mom-and-pop operators. Roofstock often acquires property from the large portfolios of institutional investors and sells the units without asking renters to vacate. The transition is seamless, according to Beasley, without the need for showings that disrupt the renters’ daily lives.

“I bought a home through our site,” says Beasley. “I’ve never seen it, and I’ve never talked to any of our tenants. The tenant doesn’t know who owns it, could be me, could be anybody.”

How investment technology continues to evolve

Many of the tools and platforms allowing remote real estate investment expect the market to keep growing. It’s capital finding a way, allowing frustrated millennials to realize their ambitions to own. Lewis says DiversyFund has a lot of millennial investors, who are just starting to “dip their toes” into the investment world, and will eventually see more value in partnering with a service like his, where investors are guided by professionals and can take a more passive role.

“You see properties converting themselves into something of a hybrid, fluid enough to be lived in part of the year and rented out for another part of the year,” says Amiad Soto, a cofounder of Guesty, one of the world’s largest property management platforms. “Real estate is becoming more of a business, instead of something that’s fixed, and that’s enabling a lot more small- and medium-sized businesses to flourish, and for self-made entrepreneurs to grow.”

As more and more of this investment capital flows into these smaller markets and rural areas, it also brings displacement and rising prices. Hessler says that she’s conflicted about the idea of purchasing just for income: She wants to highlight those buying into an area to make a long-term investment and commitment, not just money. She’s seen how remote property owners can hollow out regions built on seasonal travel. Local owners have more competition for tourist dollars, and more speculation raises prices and turns vibrant towns into shells of themselves when locals can’t afford the rent anymore. It’s already happening in places like Joshua Tree, California, and Asheville, North Carolina.

“Make sure that you really love the place, if you’re trying to buy in that area,” she says. “The best investors are those involved in the community.”

“Filling a Roofstock-sized hole”

Pickens sees himself as a responsible property owner, one who is careful to find real estate that has been taken care of by tenants and to keep it in good shape.

“We don’t want to be renting out a bad place to a person in a bad neighborhood, barely making it or doing illicit things to make rent,” he says. “We don’t want to deal with the implications of those types of environments.”

That’s one thing Pickens loves about the service: It’s easily customizable (neighborhoods are rated on a five-star system, which takes into account a number of socioeconomic criteria at the census tract level). He can pick quality places in “quality areas,” while other investors can go for riskier locations, which possibly bring in more returns. He says a coworker who also uses Roofstock just wants to “be a slumlord,” and says he doesn’t care how terrible the house is—he just wants the highest possible return. (Roofstock doesn’t vet buyers: “As a marketplace open to all investors with the funds to invest we do not do independent vetting, but we do encourage investors who are not buying with all cash to get pre-approved by a reputable lender to signal their ability to perform,” Beasley says).

Pickens’s end goal isn’t to create a real estate empire. He simply wants enough passive income to provide for his family, and be able to work if he wants to, not because he needs to work (he declined to say how much he was currently making on these properties, or his final goal). So far, Roofstock has helped move him toward that goal. In a conversation with coworkers about what they were going to do with their bonus money last year, one looked at Pickens and said, “he’ll do what he always does: buy another house.”

“We had a Roofstock-sized hole in our life, and this filled it,” Pickens said. “We knew we wanted to invest out of state, but didn’t have the time to do it. It’s been a year of me interacting with people on Roofstock. I can say this is legitimately awesome, and everyone should do it. ”

When asked what his favorite property was, Pickens cited the Memphis duplex, his first purchase, which has offered great returns. When he was then asked what neighborhood it was in, he replied “That’s a good question. I don’t know.”

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