Real Estate Investment: The Next Frontier for e-Commerce
Why would anyone buy real estate without physically being there to see it? The short answer is that new technologies and improved data access now make it possible to invest in real estate with increasing confidence without physically being there. This is a big deal if you think about it. If you truly could buy real estate like you buy stocks or bonds, how might you think about your investment strategy differently? Without geographic constraints, the world becomes your investing oyster.
Take rental homes for instance. There are about 15 million of them around the U.S., representing about $2 trillion of assets, and an estimated 70 percent of them are owned by investors who live within a one-hour drive. While arguably convenient, this is a terrible diversification strategy as it only compounds concentration risk. For many individuals, their primary residence represents the largest investment they have. Layering on more real estate exposure in the same geographic area is the real estate equivalent of ‘doubling down on’ rather than ‘splitting eights.
Most experienced financial advisors will encourage a diversified portfolio of stocks, bonds and real estate or other non-correlated alternative investments. What is important to consider is that while real estate may have low correlation to the equity market, one could have real estate assets which are highly-correlated to each other. Fortunately, new technologies are making it possible to open up local real estate markets to global capital investment, allowing investors to buy properties with increasing confidence without geographic constraints.
Housing can be an emotional purchase for those seeking a home to live in with their family. However, when investors buy properties to rent out, they are more concerned with the cash flow potential rather than the color of the kitchen cabinets. Consequently, more and more investors are feeling comfortable buying investment homes sight-unseen, leveraging tools that have become available over the last several years that level the playing field for non-local investors.
During the recent housing downturn my partners and I purchased thousands of houses and converted them to rental properties. When we first started buying them in 2009, we knew they were cheap, as some had dropped 60 percent or more from their peak values, but we weren’t certain they could be rented out and managed profitably. Since the tools to do this did not exist, we leveraged cloud and mobile computing to build an operating platform to allow us to acquire and manage thousands of homes efficiently.
Armed with iPads, everything our employees did was captured in the cloud, allowing us to utilize big data and business process automation to transform what had historically been a sleepy ‘mom-and-pop’ business into one that is now embraced by some of the largest institutional investors in the US. These tools have been rapidly adopted and are now used commonly by large investors and increasingly by local and regional players, allowing visibility and efficiency of operation not possible even five years prior.
As my co-founder and I started building our new real estate marketplace, Roofstock, our goal was to squeeze out as much cost and inefficiency in the transaction process as possible and allow individuals to buy existing cash flowing rental homes with confidence from anywhere in the world. We realized that in order to do this we needed to build a platform that allowed investors to purchase properties without a need to get inside, since these homes were occupied by a rent paying tenant and thus could not be shown without disrupting them.
As we broke down each stage of the buying process, we realized there were really only two reasons investors needed to get inside of homes prior to purchasing them. One was to assess the condition of the property in order to factor in renovation costs into the purchase decision. The other was to determine the functionality and attractiveness of the floor plan. Everything else could be done remotely, leveraging tools like Google Earth, publicly available school and crime data, rent and home price appreciation forecasts, median income and employment data, and so on..
That ‘last mile’ of visualizing the interior and condition of homes is now being addressed as new companies leverage state of the art visualization tools combined with detailed up-front inspections conducted in advance of marketing properties. The rapid advances in virtual reality have the potential to fundamentally change the way real estate is marketed and sold around the world as the experiences become richer and more realistic over time. Also, technologies like Docusign and other digital signing platforms are reducing the need for paper documents, as we move towards a digital closing process which ultimately will allow investors to purchase properties securely from their mobile device much like they buy books today.
When that happens, look for digital retailers like Amazon to take a real interest in the largest asset class in the US, which is the $30 trillion housing sector. Free closing with your Amazon Prime membership? Not as crazy as it might have sounded a few years ago.