Ryan Frazier (03:01):

And so when you think about that model and how is Arrived different from maybe some of these other platforms for investing in real estate online, we’ve really focused on individual single family rental homes. It’s an asset class that we really believe in. I think that it’s also an asset class that retail investors intimately understand. Most people have rental properties as part of their life, versus maybe some of these other asset classes or commercial debt, they may not have as much exposure to.

Ryan Frazier (03:30):

And so we really felt like it was asset type single family rentals that the vast majority of people could relate to. And then in terms of the product experience, we wanted people to be able to pick and choose which properties they’re investing in so that they could have some self-direction, some discernment on maybe what markets are they investing in, what types of properties are they investing in, or what property attributes, maybe they care about climate change and want to invest in properties with solar panels. We can really make all of that information available and let people create their own portfolios.

Ryan Frazier (04:02):

When you look at what people had done in the past in this space, I think there’s a lot of people who brought more of institutional investing online. And in doing so, they created these larger real estate funds where you’re investing smaller dollar amounts, but you’re investing in all of the properties or assets that they’ve purchased in the past, that they’re purchasing today, and that they will purchase in the future. And you lose a little bit of that discernment on where your money is going and what ultimately you own. We’ve also seen folks that have created access to investing in real estate debt, so playing the bank, which we think also is a great model.

Ryan Frazier (04:40):

But for us, we’re really focused on the equity position, equity ownership and in residential real estate. And we think that it’s really about, how can we make this process as simple and easy as possible and remove the barriers that we see for most people to invest, which are capital, the available time, and the expertise really to get started? And so that’s Arrived in really a nutshell, is just making it easy for people to access rental property investing without all of the work and personal your responsibilities or personal liability behind the scenes.

Cameron Wu (05:14):

I think Ryan covered it pretty well. The part that I’d like to focus on is really solving the problems of time, capital, and expertise. I come from an entrepreneurial real estate family myself. So I’ve seen firsthand how difficult it is to be able to get started in real estate investing. My family had that very much as their targeted goal, so everything that we did was focused around that, but it was like working two full time jobs. You have to generate enough cash flow through working your day job or whatever entrepreneurial venture. And for us, it was very mom-and-pop small business type things, which for anybody who’s ever tried to run a restaurant or have their own store or shop, is extremely time and labor intensive.

Cameron Wu (05:58):

And then you have to be even better at saving than you are working. It’s one thing to earn money, it’s another thing to be able to save it towards your goal of say, making investments or being able to invest in real estate. So for me, what was really eye-opening about our model was how well it actually solved those three access problems that everybody seems to have. You can have enough capital and time, but you may not have the expertise in real estate. You could have time and expertise, but you may not have enough capital. So really solving for all three legs of that stool is a very high hurdle.

Cameron Wu (06:31):

And a lot of people want to be investing in real estate, it’s fundamental. We get it pounded into our heads that it’s the cornerstone of generational wealth and building a better life for your family and then your descendants down the line. And it’s so extremely difficult to actually meet those hurdles. I’m very enthusiastic about the business model. I think it solves a real problem, and I’ve seen it from my own firsthand experience. A little bit of anecdotal evidence from my point of view of why the business model is really a sound one, from my opinion, and just a strong believer in it, which was my conviction in joining the team.

Cameron Wu (07:06):

Because I come from the residential world and come from big REITs. I was doing pricing and analytics at American Homes 4 Rent second largest landlord in the country. And what caused me to really make the leap was just true belief in the model.

Robert Leonard (07:20):

I personally invest in single family houses as well. I’m starting to get out of that asset class a little bit personally, but a lot of people that I’ve talked to either on the podcast or even just one on one to talk about and learn a little bit more about real estate investing have told me that single family homes can be an interesting asset class from a returns perspective, but it’s just difficult to really build a portfolio around them because they’re just hard to really scale. So I’m curious, I know you mentioned, Ryan that single family homes are just really understandable for a lot of individual investors, but what are you guys seeing from an asset class perspective? Why do you really like single family homes as an investment? How are you dealing with the difficulty of scaling with single family homes?

Cameron Wu (07:59):

Yeah. I’ll take a stab first at why single family homes. What’s the fundamental thesis that drives the desirability as an investment class? And I think it’s twofold. It starts with the fundamental demand. It’s probably the best asset class to live in for most people, especially those who are forming households. And from what we’ve seen from a population dynamics point of view, millennials, they represent the largest population segment within the country. It’s somewhere around 23%, I believe, from the last data that I saw.

Cameron Wu (08:32):

But what’s interesting about that is that they represent about 50% of head of household designation on IRS tax forms. So they’re really in the driver’s seat of making those head of household choices for where to live, starting families, etc, etc. The demand, we’ve seen, is extremely strong. So it’s supported by extremely strong demand. And we’ve seen a general shortage of the supply because in the first half of the decade from the end of 2010s, there was just no building going on. Something around 40 to 50% of home builders were wiped out from the great recession, the great financial crisis.

Cameron Wu (09:09):

And we really didn’t build for a good five to seven years. Now, you could argue that some of that supply was pulled forward leading up to the great recession, but nonetheless there’s a general shortage of the investment class. There is a high desirability factor with the asset. And from an investment point of view, you can monetize it in a lot of different ways. It’s probably the most flexible asset, we think, as far as an investment thesis goes. You can rent it out for income, which is what a lot of people imagine when they’re investing in the asset class.

Cameron Wu (09:41):

But really, the true benefit is having your capital tied into an asset that has generally appreciated, the further that you zoom out, the more clear that the line is that over a long time horizon, single family residential just appreciates. So there’s certainly a lot of tailwinds going for the single family residential real estate class right now as far as the supply demand dynamics, it’s got great income potential, and you’re able to get probably the best financing that a retail consumer can possibly get with respect to the asset in terms of mortgage rates, the ability to lever the asset.

Cameron Wu (10:16):

You can really deploy your capital into it with confidence, as long as you’re willing to hold it for a long enough period of time, get the income from it. And I think that’s why it is such a great investment class. Whether you think that the market is overheated or not, if you zoom out and you’re on the right time horizon, it’s attractive because, one, yes, people are familiar with it, but it’s got such great demand characteristics and such great monetization through its income capabilities.

Ryan Frazier (10:44):

And then just answering the second part of the question around how do we facilitate scaling, mass-managing of single family properties? And I think this is something in Cameron’s background with American Homes 4 Rent, the second largest single family homes landlord in the country, and really something that we’ve observed and learned from some of the institutional investment into single family homes. As they have started to invest and acquire more properties and operate them at much larger scale, there has been a cottage industry of service providers that have stood up to facilitate that type of management.

Ryan Frazier (11:21):

These are companies like Tech Enabled Property Management Partners that are semi national title and escrow providers, National Homeowners Insurance, all of these services that facilitate the day-to-day operations for being able to operate across many markets and many properties. We really view our role in this is taking some of that foundation that’s been laid by some of this corporate investment in rental property, and putting our own operations on top of them and really allowing retail investors to benefit from those same economies of scale that have been stood up to serve these institutions where now we can offer today investing in rental properties across 17 cities, and over the next year, we’ll probably be in at least 40 cities.

Ryan Frazier (12:08):

So you get market diversification from day one. You also get great efficiency in terms of all of the service providers, whether that be property management, homeowners insurance policies, the title and closing costs, brokerage, all of these things we can help facilitate and use some of our scale to pass that onto investors versus if they were saving up for this six-figure down payment and buying one property in their backyard and managing that on their own.

Robert Leonard (12:34):

I want to talk a bit about your business model. How does Arrived make money and what is the business model for you guys?

Ryan Frazier (12:42):

Yeah. There’s really two components to our business model. One is an upfront transaction fee that we earn when clients come and invest in a property or buy shares. And then the other is an asset management fee that’s a recurring fee over the life of the investment. On the acquisition or upfront transaction fee, we make about three and a half percent of the property price for each offering that we put together, and that’s really for our work in identifying the property, preparing it for investment and managing this initial setup process.

Ryan Frazier (13:14):

We haven’t touched on it yet, but we’ve created an entire framework for SEC qualification for every property that we offer on Arrived. So really what we’re doing is we’re going under contract, buying these homes, and then creating a house IPO, an individual house IPO that then investors come and buy shares of. That sourcing fee or acquisition fee that we include on each property is part of the initial share price. So when clients come and buy shares, it’s incorporated there.

Ryan Frazier (13:40):

And then on an ongoing basis, we collect 1% of the equity that’s invested in each offering as an asset management fee per year for our role playing the asset manager on that behalf, and that’s based on the initial equity that’s invested in those homes. And that’s really our fee structure. We haven’t added any kind of preferential share class or any kind of carried interest on the profit on the back end. Really, a big piece of the reason why we haven’t structured that into the business model is we were really working hard to make investing through Arrived near the economics of directly investing in properties on your own, but without all of the work that’s typically involved.

Ryan Frazier (14:23):

We took that North Star and then crafted the business model really around that to facilitate investment. And then we also try to be really transparent on that business model and we put the fees for the sourcing fee that I mentioned on the upfront. And the asset management fee, that’s recurring on every property page, so investors can see that front and center, see what Arrived is earning on, on each investment and really try to be really forthcoming on that on all of our offerings.

Robert Leonard (14:51):

I want to also talk a bit about a pretty large named investor, well-famed investor that has backed to your guys’ company. So talk to us a bit about the investment you guys received from Amazon’s founder, Jeff Bezos.

Ryan Frazier (15:03):

Yeah. So we were very fortunate to have Jeff Bezos as an investor in our seed round in our recent series A round. We just raised $25 million that I think we announced a few weeks ago. We feel really fortunate to have folks like that as an investor in the business. We got connected to him and his team through one of our other angel investors and a long time supporter of our business, Hadi Partovi who was the founder of Code.org and just an incredible investor and supporter. Folks like that we’ve had around this business, we’ve just been so lucky to be able to have that feedback and insight from folks like that.

Ryan Frazier (15:45):

With this round, it was led by Forerunner Ventures and Brian O’Malley there. They have done such an incredible job of identifying and supporting these incredible consumer brands very early in their development. And I think what we have chatted about with Jeff Bezos’s team and Bezos Expeditions, and really all of our investors, is, our vision for an incredible consumer brand in this space. It’s amazing that real estate and specifically residential properties it’s the largest asset class in this country, but there is no great brand when you think of that really is customer first and provides that broad access to ownership.

Ryan Frazier (16:27):

So that’s really what we have been focused on. And we’ve been trying to surround ourselves with people on the team or investors in this business that have created those great companies in their own markets. And I think that they see that same opportunity for an enduring company in this space, and so we’re excited to keep investing in that. And so with the round, really what we’re doing is continuing to expand markets very rapidly. I think I mentioned that we’re in 17 cities. We should be in 40 cities over the next year, at least. We are also starting to launch new asset types, still within single family to start, but we’re launching short term rentals later this summer, similar to investing in and owning rental properties.

Ryan Frazier (17:13):

There are hundreds of millions of people who have now experienced participating in a vacation rental or an Airbnb and staying in one, but so few people have had the opportunity to participate in the ownership economy or host economy for the short-term rental industry. And so we think we can play a really important part in giving more people access to the host and an owner side of the economy. And hopefully, we level the access within these markets too so that more people can benefit from these great businesses like Airbnb that have completely changed the way that we travel.

Ryan Frazier (17:46):

And so those are some of the ways that we’re planning to use the capital that we’ve raised, excited about what’s to come here over the next couple of months and next year.

Cameron Wu (17:54):

One other interesting point to add about our investor cap table that Ryan alluded to is this confluence of retail fintech real estate investors that are all bullish on our business. So we’ve got Spencer Rascoff, who is the co-founder and former CEO of Zillow, obviously a giant in the real estate tech world. Got Fred Tuomi, who was the CEO of Invitation Homes, who’s the largest single family landlord in the country with nearly a hundred thousand homes across the US.

Cameron Wu (18:28):

And then of course the Core Innovation Capital, who led our seed round, really large in the fintech world and have sponsored and invested in great companies. And of course, Forerunner Ventures, who’s a giant in the retail industry. So the cap table to me is so interesting as it’s a testament to the intersectionality of our business model, where as Ryan said, it’s amazing that it hasn’t really been tapped into yet. This intersection of retail and real estate. I always enjoy looking at our cap table to look at it as proof that a lot of big name players have seen some great potential in what we’re doing.

Robert Leonard (19:04):

Ryan, you mentioned that you guys are going to get into some other types of strategies within the single family rental space. And I was actually curious coming into this interview, if you’re able to sell shares in some shorter term projects, like maybe a single family house flip, are you able to sell shares in something like that? Or does it have to be a property that you plan on holding for… I know short-term rentals are obviously, the tenants are short term, but you still can own the property for years. So can you do it on a strategy where you’re only owning the property for a short period of time like a flip?

Ryan Frazier (19:33):

The short answer is yes. Really, the model can work for any type of asset or investment type, whether that be a shorter term flip where we’re acquiring a property, doing some improvements and then reselling it and paying out the shares, that could be other asset classes like short term rentals that we mentioned, but perhaps commercial or apartment buildings or even land. And it could be beyond real estate. I think for us, we focused on long-term investments in equity positions on real estate, just because we felt like it was really what was most underserved right now to the widest potential audience.

Ryan Frazier (20:14):

And so that’s really what we’ve, we’ve been targeting initially is these longer term rental properties, whether that be a long term rental or long term investment that’s operated as a short term rental. It’s really a bit about thinking about the long term. And I think the reason why is we’ve just seen that real estate over the years, if you’re looking back historically and you look at any investment period of five years or more, it just does such an incredible job of compounding and providing durability on the investment value.

Ryan Frazier (20:46):

And at a time like right now where we’re seeing some uncertainty on interest rates, we’re seeing uncertainty on what will happen with inflation, real estate becomes one of those nice hedged assets that I think people can own for the long term as a store of value and still benefit from the cash flow over the long term and the depreciation offsets to protect that cash flow. We just think it provides such a unique role right now. And then longer term, we’ll layer in these other types of investments as well.

Robert Leonard (21:17):

I’m actually pretty interested in talking about the nuts and bolts of how your company is set up and how it works from an operational and legal perspective. I think a legal perspective is really interesting to me because of my experience with single family houses. I’ve actually done some research and some capital raising myself for single family acquisitions. And in my experience, the process is not really simple or cheap. And I’ve looked at a couple of properties on your platform and I’ve seen this, some of them have over 800 investors.

Robert Leonard (21:45):

And of course the investors don’t see what’s going on behind the scenes, but when investor chooses to buy shares in a property on your platform, what happens on the back end? What does your team have to do from a legal perspective to make it all work?

Ryan Frazier (21:58):

That’s a great question. And you’re absolutely right, that we work really hard and do a lot of work to hide some of those things and make it not the burden of our investors. We do a lot of work in advance to make sure that the process is very simple. And maybe as a starting point, we just talk about why have we done the upfront work on the legal and operations side? And what is the impact to our product experience for clients? There’s really two reasons that we went down the path of this higher lift on the legal and regulatory side, where we have now created this IPO process for individual houses where we’re registering and qualifying every offering through the SEC.

Ryan Frazier (22:39):

And we did that because we wanted to first allow non-accredited investors to invest. And if you’ve done private placements or private investments before, you know that ultimately, a lot of times, those are reserved just for accredited investors. And there’s a huge hurdle for the issuer, for the company, issuing the investment product, if they want to invite non-accredited investors to also participate. And so being able to do that and really making Arrived a place where anyone can invest, if you want to invest 100 bucks or you want to invest $100,000 or more, we should be able to facilitate and serve you. And so that was critically important for us.

Ryan Frazier (23:15):

The other is to be able to facilitate better liquidity options within real estate. I think that we realize that as more and more properties are funded within Arrived, then more and more of those transactions can happen on Arrived first and people can have liquidity on their shares or their ownership position without selling the underlying real estate and having to go through the process and cost of transacting the whole property. And so facilitating that liquidity access and a secondary market is a big piece of that as well.

Ryan Frazier (23:49):

And so allowing for nonaccredited investors and accredited investors to invest at the same time and serving that liquidity is why we went down this process. We spent about a year working on the regulatory side, even to launch the product. And that was really working on essentially this process for creating and then publishing for people to come invest in these house IPOs. Now that we are in a groove with that process, we have an incredible legal team at Arrived, which is somewhat uncommon, I’d say, for a startup at our phase, but it’s such a critical part of our business.

Ryan Frazier (24:24):

We’re creating these investment opportunities and these investment products and we need that in house as an expertise. And they are now to a point where we can basically put properties through our process, submit them through our qualification process with the SEC and ultimately make new offerings available every week. And that’s incredible that we can go through this process in a week now, something that took nine to 12 months originally. And so what is that process then? How does a home get to on the market, to on our website for people to buy shares?

Ryan Frazier (24:56):

Cameron and in our investments team are scouring all of the markets that we’re in, the 17 cities currently, and then also deciding what markets do we go into next. And really, that decision process in simple terms is, where is their growth? And we look at, let’s say, population growth in each of these cities within perhaps the top 100 to 150 major metropolitan areas in the country. And then we’re targeting those that are just seeing the most growth ultimately that we think are going to have the best enduring value. We’re opening up those markets and interacting with our partners in each market, for example, property management.

Ryan Frazier (25:35):

And then as we look at properties that fit our investment criteria, that we think are incredible investments, we’re making offers on those. And right now, we are analyzing something like 50,000 home transactions per month that are happening within our market footprint. And we are making offers on a very small percentage of those, I think it’s something like 0.1%. So very discerning in terms of the investments that we do end up buying. We’re really making sure that we believe in this as an investment opportunity for the very long term.

Ryan Frazier (26:07):

And then as we make offers and those offers are accepted, we place the contract and the property ultimately in an LLC that owns that home. So every property on Arrived is in this LLC segment that limits the liability, of course, that is a limited liability company, that’s part of what that entails. It makes sure that there’s no personal liability on behalf of anyone investing in the offering, and it also shields the economics, the returns or the performance to that specific house so that it’s not crossed across any of the other homes. Doing that allows investors on Arrived to pick and choose and build their own portfolios of whatever segment of properties that they want.

Ryan Frazier (26:51):

And so a home goes into an LLC, then we close on that home. For some of our properties, we’re adding a mortgage, a permanent loan that provides leverage on the returns for that property. We’re doing some properties at 0%, maybe for investors who want less risk in their investment, and then some at 50% or 70% loan to values or leverage amount. And when we add those loans, they’re non-recourse so not in the name of our investors who are investing in that house or to the operating company, they are just backed by the individual house.

Ryan Frazier (27:25):

And that removes a lot of the personal liability for something like being underwater on a loan on behalf of an investor. This debt is not in their name, it’s not on their personal balance sheet, they’re not going through a credit check or credit report. And so that’s an incredible way to access leverage for retail investors without it hitting their personal balance sheet and maybe impacting their ability to go get a loan for a home that they want to live in, or maybe a car or anything else that they want to do or invest in. And so we then close on the home, we place it on our website for people to come and invest. It takes less than four minutes to create an account and make an investment on Arrived.

Ryan Frazier (28:01):

You go through some steps to verify your identity, you link your bank account, and then you e-sign a quick purchase agreement. And it’s an incredibly fast experience when you compare it to buying a home on your own, where in a few minutes, you can buy shares of a house versus if you’re going and buying a home on your own, you’re spending 30 days just in the underwriting. Once you make an offer and have it accepted, now you have a mortgage company doing a review, they’re doing a title review. All of these things, you’re sitting down at a signing table with 100-page document to sign in 25 different places.

Ryan Frazier (28:36):

We’ve really done that work in advance. The title company is still a part of this, but Arrived of facilitating that process on our end, and then allowing investors to come in and participate as an LLC member that already owns the title to that property. And then from that point on, Arrived is the asset manager, we work with local property management partners to manage the day to day. And the investors, the shareholders of that home ultimately are the sole owners of that property. If you’re an investor in a house, you buy 1% of the shares, you get 1% of the economic rights to that home. So any of the cash flow coming from rent after expenses, we pay out in the form of dividends on a quarterly basis.

Ryan Frazier (29:20):

And right now, those dividends are averaging maybe three and a half to six and half percent per year. And then you also get the rights to renew the property value appreciation. And we update those share prices right now on a quarterly basis to show that value change. And then you get to enjoy that appreciation and realize it either when you sell shares or when ultimately the home is sold at the end of a longer-term investment period. And so that’s a little look into what’s going on behind the scenes. And I feel like it’s a long winded way to talk about what we’re doing, but the reality is, that’s because there is so much that’s being done in advance before a house actually gets posted on a Arrived’s website and people can come and invest.

Robert Leonard (30:04):

It was a long response, but it was a good one and it opened so many other questions that I have. And so let’s just run through those real quick here. You said you’re analyzing almost 50,000 properties a month, how are you doing that?

Cameron Wu (30:17):

We combine a great data platform with the human element. What’s great about working at Arrived and a FinTech company, investment company in general is that we have a lot of engineers and we have this culture that really prioritizes data. And I know a lot of companies say that, but half of our staff is engineers. So we get the benefit of having a very tech-forward environment. We do have our own internal systems that allow us to scour the markets and we use data providers such as CoreLogic, HouseCanary in any of the more renowned, trusted players in the space.

Cameron Wu (30:56):

And with our own internal tools, we’re first letting machines do what they do best, which is get some high level analysis, hunt and gather the data points, use APIs to bring in all of the information into an underwriting model that from our experience within the residential single family, a home industry, we have some pretty good understandings of what the cost models are based on year built, based on size, based on a lot of confluence of other factors. Then we essentially underwrite it to get a baseline understanding of how that asset is going to perform. Not all homes are made equal in terms of their performance as a rental home. So we really bias towards those that have a good balance of strong dividend yields, as well as appreciation.

Cameron Wu (31:40):

But then really the magic comes once we have that underwritten model created, then we go through and we approach it very much like a consumer. So we’re going through all of these listings and through some various sort methods, we’re able to tackle most of the ones that are going to be within a pretty good hit rate of being a good rental. And we use then what humans are best at, which is visual processing and passing the smell test. So we check it out on a map, we look at if there’s any kind of obstructions that would be not desirable, such as backing up to a high traffic road, or are there big 10,000 volt lines in your backyard?

Cameron Wu (32:19):

It’s not easy for data systems to process this kind of information, but it really drives the value of a property. I got asked a question one time about whether it makes sense that we can beat the market. Can an investor who’s on the Arrived platform, are they really better off picking homes one at a time than they are say, investing in a fund? And my answer to that was actually yes. And it’s not intuitive, but I do think that it makes sense once we peel back the onion. Single family residential assets, they’ve got an income generating capability, but ultimately, the desirability of the home is based on some very human evaluation criteria. So if I’m a renter and I’m looking at a house, the pictures really start mattering.

Cameron Wu (33:05):

The backyard really starts mattering. All of the attributes that we look at when we’re underwriting, a machine is not necessarily able to pick up. So can we beat an algorithm? Can an investor beat an algorithm? I think the answer is yes, because the value of these homes is driven by very human decisions. So who’s going to be buying it in seven to 10 years when we sell the asset? It’ll probably be an owner occupant who’s looking for those same desire, but ability characteristics that we screen for in the beginning. When we’re looking at all of these different homes to bring onto the Arrived platform, we take very seriously the importance of the human element in finding those best investments.

Cameron Wu (33:44):

It’s not just, does the cap rate work? If so, then we’re going to buy it. The cap rate has to work, the neighborhood has to work, the schools have to be good, and it has to look good. And if we get all of those things right, then we know that we have an asset that’s going to be a winner in the long run. And that’s why we only end up offering on that 0.1% of homes, because a lot of homes will work from an economics point of view, just like a machine underwriting a cap rate, which is how a lot of the bigger players purchase their homes, but it doesn’t produce the best investment returns. We’re really looking to get those best investment returns off of those very human criteria.

Cameron Wu (34:22):

And we use machines where we think they’re best, which is basically the top of the funnel. Can you get us the basic information such that we can narrow down the scope and the universe of which properties look good? And then we meticulously go through it with the human perspective. And that’s what I think the winning formula is for picking out great investments.

Robert Leonard (34:41):

What benchmarks do you use in your analysis, whether it’s returns or you mentioned good school districts, what is a good school district? What’s a good neighborhood? What’s a good return profile? Break down some of the most important benchmarks that you’re looking at in your analysis for us.

Cameron Wu (34:57):

Yeah. From an economic point of view, we look at zip code appreciation potential. So a lot of the third party providers, they provide these great AVMs at a little bit more of an aggregate level that are predicated on population metrics, so the growth of the population is their demand. What’s the relative supply coming on? So we use their, call it their machine learning and their data science to estimate, is this a good zip code to be investing in? Because if we’re holding it for that seven to 10, five to 10, some medium term length, then we want to be assured that the appreciation is there, which is really in my opinion, the fundamental reason why you invest in single family homes.

Cameron Wu (35:39):

Rental income is a great cherry on the top, it’s great to be able that tax advantaged income in the meantime, but we’re really looking for appreciation. So that first and foremost has to be there from an economics point of view. In terms of what’s a good neighborhood, there’s a lot of different opinions, and there’s a lot of different factors based on the geographic area that you are looking in. But generally it’s what you would think of from imagine buying your own house that you want to live in. Is there convenience to major roads and highways? People got to be mobile and be able to move around.

Cameron Wu (36:15):

A good neighborhood in my opinion is also one that is strategically positioned, both in terms of amenities, proximity to major infrastructure, being in a highly desirable quality of life area. So are the schools good? Let’s say that a six out of 10 or seven out of 10 school rating, which is typically going to be evaluated by standardized test scores and some subjective surveys. There’s different ways of looking at schools, but there’s a pretty high correlation between good school areas and the price of the real estate. So if we can find those areas where the income is working out, then it’s the old adage of location, location, location.

Cameron Wu (36:55):

And that’s typically what I’m looking for in a good neighborhood. And then if you get down to the house level, maybe this sounds cheesy, but a picture is worth 1,000 words. We are very, very particular about the way that a house looks both from the exterior and the interior. One of the biggest compliments we get from our investors is saying that our homes look great, and it’s not common to see an investment portfolio where it’s primarily nice looking homes. If you look at the average vintage of a lot of the single family REITs, the average home is like 1992, 1993, and it looks like it’s from that era.

Cameron Wu (37:30):

Now, are they good investments? For sure. They got them at a great cost basis during the Great Recession, and they perform as far as rentals go. But when we’re thinking about the medium term hold and selling it to that owner occupant later on down the road, we want a nice looking house. Our average year built on our home is 2017. Our average school district is about a six out of 10. We’re buying quality assets that are producing the rental income, and they’re in the path of progress and they’re near great infrastructure. I do not buy homes that are buried deep in neighborhoods. It’s just such a high gamble that that is going to meaningfully appreciate.

Cameron Wu (38:07):

Everybody wants to be near convenience and they’ll pay for that. Those are some of the data points that we do look at, it’s holistic, it’s not machine driven, as you can probably tell from a lot of my answers that it’s based on pictures, it’s based on understanding the neighborhoods and proximities to desirable attributes. So it’s not so easily captured in machine or data quite yet, but again, that’s the human element that we’re bringing to our investment process.

Robert Leonard (38:32):

When I was going through the different properties on your platform, I did notice the year of the properties being built. And I did make a mental note to myself and said, “Wow, a lot of these,” I didn’t go through every single one, I didn’t know the exact average, but I could tell that most of them were very, very new, especially when I’m purchasing houses in the ’80s, ’70s, ’60s. So to see early 2010s or later, 2010s is new for me. And so one of the first things I thought of was, how are you making these numbers work on these types of deals? Because when I run the numbers personally for like my own personal investments, I just can’t make those numbers work at today’s prices with the rental rates.

Robert Leonard (39:08):

So I’m curious, how are you guys finding the deals in those types of properties? Is it just because you’re going all cash so you don’t have no debt, so you’re making up the profitability there or how are you making these deals work?

Cameron Wu (39:20):

It’s not so much the leverage, certainly capital structure can be an advantage, especially if you’re finding cap rates that are in excess of your cost of the debt. But what we’ve seen in the first six months is of this year has not been that case. As interest rates have been rising, unintuitively, prices have actually been accelerating with that. And I think that has to do with a fear of missing out, the FOMO. So the average retail buyer or the homeowner who’s looking for their home, they get the sense that this is their last shot at getting a reasonable payment on a house that they want. So people have been bidding up to their budgets as opposed to bidding with the market. And that has contributed to that acceleration of price that we’ve seen in the first four months of this year.

Cameron Wu (40:01):

That was very counterintuitive relative to the interest rate cycle. Now, as far as you’re question about how do we exactly find these? Let’s go back to the idea that we’re only bidding and winning about less than 0.1% of the houses. So that discernment certainly comes in. And as I said, not all rentals are equal. I will say that a lot of our ability to find these great rentals lies in our team’s skills and our experience. By coming from a single family residential REITs where my whole investment team comes from that world, what we really specialize in is pricing rents. So at American Homes 4 Rent, we own over 50,000 homes and we have 48,000 lease at any given point in time.

Cameron Wu (40:42):

I’ve personally priced well over 200,000 homes. And my analyst team, they’ve done way more than I have. We really understand rents, which is of course the ultimate driver of these yields that we’re able to get. And just about every single one of our properties have leased up our performer rates or above. It’s certainly rare that these assets exist in the market where you can find better than market cap rates on a home built in 2018. They’re not all over the place, you’re not tripping over those kinds of deals for sure. But we’ve been very intentional about hiring a team that understands cash flows of the single family residential business. And that’s how we’ve been able to find them

Robert Leonard (41:23):

When it comes to actually making the offers, from a tactical perspective, how are you guys doing it? Are you working with a real estate agent? Do you have a real estate agent in-house? Do you make all cash offers and then get the financing later so that you have a little bit more competitive? I’m curious. And do you guys negotiate or are you just always offering what they’re asking? I’m curious a little bit about the tactical perspective and then also the strategic perspective.

Cameron Wu (41:46):

Great question. Because it is difficult, no doubt. Our tools allow us to make offers on properties within a couple hours of them coming out. Our underwriting tools are really great and our human analyst team is extremely quick to evaluate. On the partner side, we do work with external brokers. We do not have internalized brokerage. Part of that was a very intentional game plan to leverage the expertise and the norms of those brokers who are in those local markets. So we bring volume to their platform and we also in turn get a better white glove service from them. Being that volume buyer, they definitely service our needs extremely well.

Cameron Wu (42:27):

And we are a national company. So right now, we’re in 17 markets, but as Ryan said, in the next year, we’re hoping to get to 40 plus and eventually cover every major MSA, because we believe that there’s great investments in every single market that there is and there’s winners and there’s going to be losers. So even if you’re in a market that is generally going to be stagnant, there’s for sure still going to be winners within that market. And that’s what we strive for, is to always offer those. Being a cash buyer is 100% an advantage, especially as interest rates were rising, we’re finding that more and more our cash offer is a value proposition that sellers are getting wise to and they’re taking it, because so many deals have fallen out in the last month or two because of that rising interest rate cost.

Cameron Wu (43:12):

Once the locks expired on people’s mortgage commitments, they were unable to purchase because then they didn’t qualify with the coverage ratios, the DTIs etc. Having that cash offer and then also later having the flexibility to put in the perm loan at closing that has been an advantage. So we had our cake and eat it too because we made cash offers, but that really meant waving any contingency with respect to appraisal financing. So it came in as a cash offer, but we were always able to put on a permanent loan simultaneously with closing.

Cameron Wu (43:45):

The ability to buy fully in cash, whether we’re putting on debt or not, that’s really a non-factor because all of our offers have been coming in as cash and we represent them as cash. And if necessary, we would be able to close in cash even if we couldn’t secure the financing by the time of a strict closing. I’ll say that the other area that we really have had a lot of success in is general flexibility. A lot of the sellers in the market, they are selling their home to take out the cash, so that way they can put down the down payment or satisfy the construction, draw down schedule for a new home that they were building.

Cameron Wu (44:18):

They’re looking for two month, three month lease backs, and because we are a rental company and we’re flexible in our closing dates, we’ve been able to have a very well rounded offer where we’re not always winning on price, because that’s my goal, is not to win on price. So your question about, are we always coming in at lists or above lists just to be competitive? The answer to that is no, because we offer a pretty comprehensively competitive package. So we’ll say, “We’re going to do an as-is closing.” So we’ll take it as it is because our property management partners are going to be able to handle the rehab and we’re going to build it into our price.

Cameron Wu (44:51):

So it really offers sellers the peace of mind that they’re not going to have to go and find tradesmen and repair this and that as a contingency upon making the sell. We can also give them the three month lease back if they so want. And we’ve actually done eight month lease backs before because they just started breaking ground on the home that they’re going to be building. So between that offering quickly and just having all sorts of different levels of flexibility, as well as leveraging our brokers to guide us on those best practices, we’ve been able to secure a good amount of offers without always being the most competitively priced.

Cameron Wu (45:25):

And we get that feedback often saying, “You weren’t the highest price, but we liked your offer the best.” And that’s also a benefit of working with those local partners is that they have the capacity and the understanding of that market, as well as relationships with those other listing agents to be able to offer that insight. But certainly, it’s not my goal to win on price or else, I think we’d be doing our investors a disservice.

Robert Leonard (45:47):

Ryan, you mentioned a little bit ago that you put debt on some properties and then you just keep them in cash for other properties, mostly for a risk perspective, for some investors who just want a little lower risk in their investments. How do you decide which properties you’re going to put debt on, which ones you’re not? And then what if there are some investors that would prefer to have debt on those properties and you don’t quite have enough that want it with no debt? So how do you balance that dynamic?

Ryan Frazier (46:14):

Maybe I can speak first, just how we think about it from a product perspective and why are we doing in that? And then Cameron, if you want to jump in on the discernment of how we’re picking which properties. But in general, just to answer the question, leverage in real estate has been a really important part of just returns for this asset class. And so it’s an important part of how we underwrite properties and how we think about what is the long term value of the investment. And the leverage, of course, as you mentioned, risk is that other axiom, it can provide some positive impacts on the cash flow potentially. And it will magnify the equity, the property value appreciation, either up or down, however, the market moves.

Ryan Frazier (47:00):

And because real estate has been just such a tangible value, and even though it’s complicated to sell a property, it is a highly liquid asset given time that has made banks or financing institutions very comfortable with offering these low interest rates, which have been further subsidized of course, by the government, particularly for single family. But it has made it such a great asset class for using leverage. For us as we talk to our clients, we have some folks who just really want to have some equity exposure, but without the magnifying effects on property value, they just want to have direct exposure to real estate. They’re using it as an inflation hedge, and they just want that real estate exposure without the risk.

Ryan Frazier (47:45):

I think a lot of the more traditional mom and pop landlords out there that have owned rental properties for many years often are holding properties in that way today, they’re holding them unencumbered. Maybe they would like to tap them for equity through some home equity line of credit at some point, but really, just using the higher amounts of cash flow to enjoy that passive income and not have quite the variability on the property values. Then we have another segment of investors who may want that extra risk exposure, that extra leverage exposure. And frankly, let’s say this is someone who’s a young professional who’s still very early in their investing life.

Ryan Frazier (48:26):

They are excited to have that leverage and compounding effect on an asset that over years has proven that it’s very consistently can recover through cycles and ultimately has these great tailwinds that drive property value growth. So for folks with long investment horizons, I think oftentimes leverage absolutely makes sense. And for us, we’re underwriting properties, and Cameron, feel free to jump in with more detail, but when we’re underwriting properties, we’re really looking at what is the best use of this property? So we’re looking at the cash flow, the appreciation potential, the population growth in that market, a lot of the figures that Cameron was talking about previously.

Ryan Frazier (49:08):

And we’re trying to decide, do we think fundamentally that the cash flow would be creating positive leverage on this investment, or might this work better as an asset without leverage? And then once we make that decision, we make it available for folks to invest on Arrived and we display what is that leverage or debt amount on every property on the property details pages. And that allows investors to decide, “Okay, do I want to concentrate in only properties with 50 or 70% leverage or only properties with no debt? Or maybe I want to mix, maybe I want to invest in properties without leverage in markets like Denver so that I can still benefit from a little bit higher cash flow.”

Ryan Frazier (49:51):

“And I think that maybe the appreciation potential in that market’s a bit higher. And then maybe I’m using more leverage in some of these markets in the Sunbelt where I’m getting positive leverage on the cash flow. And I want to get some added leverage on the property value growth.” So it’s possible that we see investors do everything across the board from only investing in leveraged properties, only investing in no debt and then doing a mix. And I think that’s part of the benefit of investing through Arrived versus investing on your own or investing in these more blind pool funds, is that you have that ability to have some discernment in the investment process, create portfolio makeup that makes sense to you.

Ryan Frazier (50:32):

Also leverage the experience of Arrived’s investing team, as Cameron’s been talking about, decades of experience in acquiring and pricing and managing these rental properties, but still ultimately, be able to create a make that you’re interested in.

Cameron Wu (50:48):

I think from an economics point of view, we always have the obligation to help our investors make great decisions. So as interest rates have rised, certainly the calculus of taking out debt or not becomes more difficult. When we underwrite properties, we create effectively three potential dividend return scenarios. There’s the no leverage, the 50% leverage, and then the highest leverage which we currently offer at 70%. If we’re getting a pretty good yield at a higher leverage point, we take it when we can, because we do think that’ strategically. It is an economically advantageous outcome for our investors in that five to 10-year horizon that we’re looking at.

Cameron Wu (51:31):

So it has been increasingly difficult to find properties that really make sense with the leverage. But I think that even when interest rates do cool odd and the market stabilizes a little bit more, rents will come up and then the cap rates make sense, we’re going to continue to offer that framework that Ryan’s referring to as making a wide variety of different capital combinations that you feel comfortable with. It’s not that one is right or another, it really comes down to investment preference. And again, that’s what Ryan’s saying is, really great about the Arrived platform is pick your own adventure. That’s one of the questions that we often get on our webinars is, if we have the crowdfunding ability, why not just crowdfund all of it?

Cameron Wu (52:16):

And I think that is a prevailing sentiment among the investment crowd is that they see debt as a negative thing or as like a necessary evil, and part of what our mission is, is to educate people about the benefits of debt and the economic benefits of taking out debt on this great asset class. At the end of the day, we’ll always be offering properties moderate to no debt, but it’s going to be a function of the interest rate environment as far as the mix goes, like the proportionality. Right now, we have certainly more properties that are not using as much debt because of the interest rate environment, but we’re in a transition phase right now as well.

Cameron Wu (52:57):

As interest rates go up or go down, there’s a little bit of flux in the market, but after a couple of months, I anticipate we’ll be back to a more stable environment where you’ll have a lot more options that make sense and we’ll allocate accordingly.

Robert Leonard (53:11):

I think what you guys are building at Arrived is really interesting model and concept and it provides value to a lot of investors. And I’ve had a good time learning a bit more, not only about what you guys are investing in and how you guys think about the acquisition side of the business, but also your business model and how it all works. For anybody that has also enjoyed the conversation, wants to learn a little bit more about you guys or your platform, where’s the best place for them to reach out to you?

Ryan Frazier (53:36):

Oh, thanks so much for having the conversation with us. And for anyone who’s interested in learning more, you can go to our website, it’s just arrivedhomes.com. And yes, go ahead and sign up for an account. You can join a webinar, do some live Q&A with Cameron and I if you haven’t heard enough already, and come check it out.

Robert Leonard (53:56):

I will be sure to put a link to your guys different resources below for anybody that’s interested in checking them out. Guys, thanks so much for joining me. I appreciate your time.

Ryan Frazier (54:04):

Yeah. Robert, thanks so much again for the conversation. And everyone listening, thanks for spending time with us.

Cameron Wu (54:09):

Yeah. Thanks so much. I love the podcast. I’m actually a listener myself and the whole TIP’s network. So love what you all are doing, and I really appreciate your time and the invite.

Robert Leonard (54:20):

All right guys, that’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro (54:26):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.