Home365

Darren Nix: Welcome to another episode of Investmart with Steadily. Today we're diving into property management solutions tailored for real estate investors. I'm excited to have Daniel from Home365 with us today. Home365 has been getting a lot of attention for how they approach property management, which is quite different from the other things you've seen out there, and we're here to learn why they're becoming so appealing to the real estate investor community.

Daniel: Hi Darren, great to be here. Thank you for inviting.

Darren: My pleasure. So let's dive right in. What have you guys done differently that's causing you to get so much attention in the property space?

Daniel: Real estate investing is super tough. We're trying to make real estate investing accessible for everyone — for the masses, for anyone in this world — to diversify their cash into real estate investing. But there are a lot of risks, and a lot of people are not able to identify those risks or process them, and that's what holds people back from investing in properties. Everyone knows that this is a great store of value and that's how you can pass generational wealth forward, but the risks are what's holding people back.

The other thing is we are focusing on single family rentals, and the profile of investors — or property owners — in this space are what we call retail mom-and-pop investors, owning on average one or two properties. People that either accidentally became landlords — you know, got a house from grandma, now what do I do with it — or read Rich Dad Poor Dad and decided that's their dream to own a property in Phoenix, Arizona. Those people have day jobs, those people are busy, they don't want to hear stories about tenants and toilets. So how do we make it a super passive, super predictable investment for people — still be a landlord of a real piece of real estate — without the pain associated with being a landlord?

Here's where we came up with a completely different business model. We are pretty much underwriting the profit line for rental property. We are able to predict risks around things like vacancies — the frequency of vacancies, the length of vacancies — delinquencies, and various maintenance issues. We predict all those risks for a given property, and through a very solid machine learning algorithm which is constantly improving, we are able to predict those costs. We generate a monthly premium which rides on top of the management, blend it together into a flat rate — we call it the Profit Protection Plan. From that point on, our investors have a very passive experience, like saving money in a savings account. If the tenant is not paying rent, we are paying instead. If the property sits vacant while we market it, we are paying the rent instead. If there are any repairs of any kind, including turnovers, those are covered by us — especially useful for remote owners, and in the space of single family rentals, most of the investors are remote.

Darren: Let's use me as an example. Five years ago I bought a rental property in Chicago. If you've been to Chicago, you've seen 20,000 of these properties — it's a three-story walkup with a sub-basement and a couple of units above it. It grosses about $40,000 a year in rents, and I'm paying 8% to a property manager. If it grosses $40,000, in a good year I might take home $25,000, in a bad year I might take home zero. So how would that have been different if I was working with Home365?

Daniel: It's a great question. When you analyze the P&L of that investor — or yourself as you mentioned — you're probably going to generate around 60% to 65% net operating income, and 30 to 40% would be your operating expenses. Property management would take 8 to 10%, and it can go to 15, sometimes 20, depending on if there are turnovers that same year. A lot of evictions and vacancies can eat into your profits, and obviously a lot of what we call junk fees that management companies need to charge, because actually 8% is not a lot. How much management can you really require for the average rent in the United States — let's say $1,300 — where 8% would be about $100? So how much management can a management company really put into that property with all those crazy events?

Understanding that you would on average have around 35% in expenses, we came up with this model — a property-specific underwriting. On average, when I'm looking at the thousands of homes that we manage currently across different markets including Chicago, 9 different states, 16 different MSAs, the average would be around 20 to 25% of rent, which will leave you with around 75 to 80% NOI. That means you'll have quite a bit of money left in your pocket. The fact that we are profitable charging only 25% versus the previous 30 to 40% that you were paying is mainly because of the efficiencies and the skin in the game we have in this business — we're sharing risk with investors. The automation of the platform helps us deliver a much better service for much cheaper. Why not pay 2% for management if management is automated and you can profit from other aspects? Like the peace of mind and time that we are selling to our investors — not being involved in this entire thing. Eventually it becomes a much more profitable plan for the owners and for us as the company. Kind of a win-win.

Darren: That's super interesting. I'd love to double-click on that to understand, because one of the maxims I've internalized is there's no such thing as a free lunch. So if there's a dollar of rent coming in, that dollar of rent is going to get split somehow. If at the end of the day I'm taking home more income from my properties, then somehow money got taken out of the system — savings were had. So when you say you can effectively manage my property and deliver more to me consistently every year with a guarantee, where are those savings coming from? Maybe put differently, what does a traditional property manager wish they could do that you guys have figured out?

Daniel: Traditional managers are not getting paid a lot, and the way they operate is pretty much manual. There's really no automated platform today on the market. Most property management systems — what we call them — are pretty much flat CRM systems where you might input various data and then extract the same data in a different format. But they do not power any workflows, they don't dispatch vendors, they don't have marketplaces embedded into their businesses. So being a traditional manager means everything is manual, a lot of mistakes and errors, everything takes time, and they need to charge various markup fees for maintenance.

For example, if a vacancy can be filled in 14 days versus 35, that's a lot of money in your pocket. In our model, we are sharing the risk with the owner, meaning if we are slow in renting your property, we are paying out of our pocket. So we have all the incentive in the world to do it fast. But it's not only about incentives — it's about logistical bottlenecks. If you are a small mom-and-pop management company and you have a vacancy and an owner that wants to buy and sell, how do you split yourself across various tasks? When you build a scalable system, you can do one-to-many and address all those issues at scale, faster. The lack of efficiency in the traditional world is what you are paying for with that 40% in expenses. It can be much better. Traditional managers are not scalable, they're manual, and we pay a lot for that as investors.

Darren: What brought you into this business? How did you come to start Home365?

Daniel: My background is, among other things, marketplaces. I'm passionate about building transactional marketplaces. One of the most challenging things in running a marketplace is predicting the demand and matching it with the supply — the balance of vendors in a home services marketplace versus the prediction of how many projects they will have on a local, hyperlocal geo level. Think of Uber: every ride is pretty much the same — take me now from point A to point B. Think about a house: everything is different. The property is different — built at a different time, different place, different size. The leak in my home is a different leak than in your home. How do you match all that? That's a huge challenge that killed a lot of startups and companies from the boom era of 2006 and up, when marketplaces were hot cookies and everything was being Uber-fied.

I came to this area — I was not born as a real estate investor, that's not my history — but I was looking at this business and I saw a very traditional industry, very non-techy, with a lot to improve, high lifetime values of clients, and recurring revenue. I approached it from a scientific standpoint. If it's a closed ecosystem of property management — I know how many doors we have — I can tell you tomorrow how many garage doors won't open, I can tell you tomorrow how many water heater problems we're going to have. If I know that, I can build automation around it, predict the supply and demand, hire the right amount of plumbers — not more, not less — and then evolve them to be the best through various methods. Controlling the closed environment gives us a lot of information about what's happening in that environment.

Darren: That makes a ton of sense. One thing you mentioned is that it's hyperlocal. A pattern we saw play out four to five years ago was several tech companies trying to automate property management but not having boots on the ground. You mentioned you're in nine states and 16 MSAs — what does that look like from a boots-on-the-ground perspective?

Daniel: The beating heart of our company is an ability to process various events that are happening across all our geos and all our properties, and dispatch the right service professional to take care of that. We operate everything from Las Vegas. We have a minimal amount of people — usually customer success and customer relations people — in each market, but they are not the plumbers, they are not the photographers taking pictures of the house. The entire idea is to hire those vendors at scale, manage them at scale through our software — they have interfaces to our software — and then control the quality, fire them if needed, and evolve that to better quality. That's our DNA.

If you go to our office, you would see a lot of screens — it's like a war room. We control thousands of various events on a daily basis: projects, non-payment issues, everything that happens with property management. The thing is, we ultimately have more feet on the street and more eyes on the house than any local company with one or two field agents running across Chicago during rush hour. For example, we use gig economy workers — 1099s. Uber drivers in between rides would go to a property and put a lockbox, or go to a property and post a notice or check occupancy. Our tenants are actually opening doors in nearby properties for their future neighbors, allowing them to tour. We leverage the power of the public — the power of the market — to do anything we need to do in a very scalable way. Since everything is again a closed environment and they use our software as well, we have full transparency and clarity on what's happening at any given moment.

Darren: I can see how that's allowing you to scale rapidly while still maintaining that local focus. So what's next for you — what's coming down the pipeline over the next year for your property investors?

Daniel: We are very heavy on partnerships right now — like with Steadily. As part of the owner experience, whenever they log into their NOI portal — with a lot of charts, data, accounting, and everything — there is a section with quite a bit of value-add services from our partners. For example, houses you might want to buy: we know exactly what type of houses we manage for you, so we know that you love houses of that size and price in Vegas, for example. Our partners are injecting their inventory curated individually to the right investor. Same goes with insurance, same goes with financing, and other solutions for tenants as well — by the way, moving-in services, security camera services, internet services — just name it. It's a marketplace with an open API where we can inject pretty much any type of service to provide value-add to our owners.

We focus on management mostly, and there's a lot to improve there as well — more efficiencies — and we're trying to scale as much as we can. Not the most fun times to be a startup, but we're cruising through it.

Darren: Daniel, thank you so much for sharing all these insights into how Home365 is making property management simpler and more profitable for real estate investors like me. For those of you who are listening and looking to streamline your property operations and explore a more hands-off management approach, Home365 might just be the perfect solution for you. Be sure to check them out, and don't forget to subscribe to Investmart with Steadily for more expert insights on protecting and growing your real estate investments.