Sunday, July 31, 2022
Building A Real Estate Empire $100 At A Time
From shutting down his first startup to raising $5M to unlock a multi-billion dollar asset class only a few short months later - This is the story of Corey Walters.
In 2021, today’s founder shut down his first startup and moved back in with relatives to cut his expenses.
2 weeks ago, after raising $5M for his new startup.
If you’re like me, today’s session will blow your mind.
This is the story of Corey Walters, the CEO and Founder of Here.co, a startup that just raised $5M to unlock the short-term rental asset class for millions of investors.
This 2nd-time founder had to overcome upheaval in his personal life and rebound from a previously failed start-up.
Anyone who tells you their start-up journey was calm winds and smooth seas have not been around very long. Corey’s story is no different. He is a case study in perseverance.
That perseverance has paid off. We will look at his playbook for the six steps to creating a fractionalized investment asset class and how you can apply it.
Let's get after it!
In Today's Expert Session:
- Who is Corey Walters: From shutting down his first startup to raising $5M to unlock a multi-billion dollar asset class only a few short months later - This is the story of Corey Walters.
- Unlocking The Short-Term Rental Market For Millions: This is a case study of Here.co. We discuss the unique insights that led Corey to build Here.co, the business model that powers its growth, and its scalable path to $500M.
- How To Fractionalize A Real Estate Asset: How to unlock an asset class and create new opportunities for millions of investors through fractionalization.
- How To Find Product-Market Fit: The most important thing when building a startup is to ensure people want what you’re selling. Here are a few principles Corey uses to find product-market-fit fast!
- Here’s A Business Idea You Can Pounce On: Here’s an idea you could start building this week and the playbook to get you started - fractionalized ownership for diverse alternative real estate portfolios.
Guest: Corey Walters (Linkedin)
Video Length: 45 minutes
2017 to 2020 - Becoming An Entrepreneur, Starting (and losing) Homeworthy:
Corey’s first company, Homeworthy, was a classic case of a great idea but just the wrong time. Its mission was to have a fully remote home selling experience at a fraction of the cost of using a traditional agent.
Prop tech is traditionally not an attractive play for VC funding for various reasons, but Corey was able to raise $600k in pre-seed money basically off cold email campaigns. He experienced massive rejection during this time, and honing the skill of relentless aggression would pay off huge in the days to come.
COVID hit, and the real estate market froze for 6 months. Homeworthy was running out of money. Corey started to make cuts to try to survive. But as a young company, every employee is critical, so these cuts hit the bone.
Homeworthy closed its doors in December of 2020.
100 Days That Changed Coreys Life:
Unsure of what to do next, Corey moved his family from Portland, Oregon, to Florida.
The move was designed mainly to reduce his burn by moving into a relative's house. Shortly after shutting down his business, his marriage ended.
Corey describes this part of the story as one filled with depression (understandably so).
He felt the need to work on something, anything, to start moving forward again. For a brief moment, he considered starting a food truck. Although “Corey’s Chile Con Carne” did not materialize (my idea, not his), he did one crucial thing.
He kept moving.
There is a huge lesson here. Opportunities are attracted to forward motion. He read the book The Practicing Stoic by Ward Farnsworth. He credits this book with helping him through this tumultuous time in his life. Corey calls it the “closest thing to a bible” he has in his library.
One day, he read a stat that changed everything.
Airbnb was getting ready to go public. Part of the IPO analysis was that by 2025, 75% of travel and leisure spending would be made by millennials or younger.
He realized that this group was not captured by legacy options like hotels and would be more open to alternatives like short-term rentals.
The seed for Here.co had been planted.
2021 to Present - Founding Here.co using An Underutilized Regulation:
Corey could not shake the idea that there was an opportunity in the short-term rental market. Specifically enabling anyone to invest in this asset class with as little as $100.
He could see the two core challenges: 1) Funding and 2) Operational execution.
Funding: First, lenders don’t like vacation rentals. They typically apply traditional underwriting tools and cash flow requirements. It does not matter if a property can make two years' worth of mortgage in three months. Institutions would rather have smaller consistent payments month in and month out.
Second, how do you fractionalize an asset so that hundreds of investors can access it?
Operational execution: If you have rented more than one Airbnb, you understand the second problem intimately. Most vacation rentals are furnished IKEA chic to maximize cash flow and degrade with use almost immediately.
Then there is the problem of customer service. If it has not happened to you, you know someone who has shown up after a five-hour trip, and the key code is not working. And no one is answering the phone. Also, it’s night, and you swear you can hear wolves circling the property.
Corey solved these problems with some artistic inspiration.
He stumbled across a startup called Masterworks.io that allows people to invest in blue chip art by purchasing fractional shares. NBC reports that the platform has over 250,000 investors.
Corey realized this could solve his funding problem by fractionalizing shares using a similar playbook to Masterworks.
Corey systematized the operational execution through a series of boots-on-the-ground partnerships and internal systems.
Corey predicts the domestic market for Here.co caps out at $500M, and he is not stopping until he has all of it.
The Problem: Real estate Investing Is Broken
There are mature industries, and then there is real estate. Massive pools of capital all chasing similar deals. Market risk. Counterparty risk. Heck, even the weather is a problem. Force majeure, anyone?
The Solution: Fractionalized Investing
Much like a mutual fund diversifies holdings and aggregates buying power, fractionalized investing also decentralizes financial hurdles and operational risks unique to real estate. Downpayments, Property management, guest relations, and other intensive aspects of owning a vacation home are accessible to any investor.
How They Make Money: There are 3 core revenue streams for the model
1) A Sourcing Fee: It's hard to source, diligence, prepare and fractionalize a rental property - Here.co charges a sourcing fee of 1%-10% of the asset price.
For example, if Here sources an investment opportunity with a market value of $500,000, they may charge an acquisition fee anywhere from $5,000 to $50,000, depending on how much they need to invest into the property.
2) Asset Management Fee: There is a 1% asset management fee to defray the annual SEC filings and compliance costs. For example, if they manage $100M worth of investor assets, they’ll charge $1M (1%) in the form of a management fee.
3) Property Management Fee: Real estate is an operational business. Homes need to be cleaned, squeaky doors need to be fixed, and the lawn needs to be mowed. There is a 10%-30% property management fee to accommodate these costs.
All costs are disclosed and determined to maximize deal flow transparency.
The Path To $1B: How The Company Plans To Scale
2022: Build A Minimum Viable Product - Here.co has grand ambitions. This year, the company plans to launch in 20 markets, raise from 50,000 individual investors, and grow to $25M in GMV.
2023: Product Market Fit - The company plans to have a rinse-and-repeat process in place at this point. It plans to launch in 100 markets with 500,000 investors and grow to $250M in GMV.
2024: Grow, Grow, Grow! - At this point, the company plans to be a recognized brand in short-term real estate investing with a global footprint, over 750,000 investors, and over $500M+ in GMV.
How To Fractionalize A Real-Estate Asset:
Here’s a high-level overview of how Here.co fractionalizes a real-estate asset. This is not a definitive guide, but you can begin to see how the machine works.
Step 1: Find Unique Properties In High-Demand Vacation Destinations - It is critical to understand that short-term rentals are either flat-out illegal or don’t perform well in many locations.
Here.co is not looking for your cookie cutter rental. They unearth properties that create a truly unique experience for guests. These properties have staying power and drive long-term, defensible revenues.
Step 2: Setting Up The Fractionalization Infrastructure - Fractionalizing a property isn’t as straightforward as purchasing a home alone. You'll need a broker-dealer, transfer agent, escrow agent, SEC counsel, and EDGAR firm onboard.
Corey was resourceful and noticed that companies like Masterworks were fractionalizing their assets using The Dalmore Group. Corey reached out, and they helped him piece together the rest of the puzzle.
Step 3: Purchase & Operationalize - Corey purchased the first home for Here.co on the open market. He knew this market intimately and had the right connections to get the house fixed up, furnished, and listed on platforms like Airbnb and Vrbo. He had done the prep work ahead of time to identify strong property managers and partners in the region.
Step 4: Apply For SEC Approval Under Regulation A - This regulation allows companies to offer and sell securities to the public but with more limited disclosure requirements than what is required for publicly reporting companies.
Step 5: Fractionalize The Asset - Once the SEC approves, Here.co determines a fair market value for the property and offers fractional shares to new investors. This process is very similar to raising a round of funding in a company.
Step 6: Reporting & Payouts - At this point, the asset is live. Any payouts will be deposited directly to an account Here.co creates for its members. If the property generates sufficient funds to make distributions, investors receive their pro-rata (based on % of ownership) distribution quarterly.
Corey’s Guide To Product-Market-Fit
Any startup's goal is to identify a problem, create an amazing solution to that problem, and then develop systems to scale that solution to the masses.
There’s an art to this - if you solve the wrong problem or build the wrong solution…you lose. Here are a few best practices from Corey:
1) Do Not Build Systems…Yet - This will anger the process nerds out there, but every system you put down in a ‘manual’ creates resistance to any pivots. It creates a “but this is how we’ve done it” mentality that may cause you to miss critical signs that you should pivot.
2) Iterate Your Way To Success - A startup has 2 phases - A value hunting phase, followed by a growth phase. During the value hunting phase, a company is just trying to figure out what it is. Answering questions like what problem to solve, what to build, if people want it, and how much to charge for it? This process may look disorganized, but there is a method to the madness. No one is smart enough to predict exactly what the market wants, so the best thing to do is try everything until something sticks.
3) Double Down On Your Best Growth Channel - Once you know what you’re building. You should get it out into as many hands as possible. Not all growth channels are created equally, so pick a few different channels and begin testing. After several iterations, Here.co discovered that influencer marketing is their best performing channel - now they’re doubling down.
The Context: Real estate is so competitive that the margin on traditional asset classes is incredibly low. Few markets are left where this rabid competition does not depress yield. Individual deals become incredibly risky in this environment.
Alternative real estate such as RV storage parks, parking lots, boat slips, and land for rent is an entire ecosphere that still has deal flow and solid margins.
The Problem: These properties are expensive, making it hard for small investors to access, but drive great returns. But they have another issue…they are not sexy at all. Like old folks home unsexy (this is not ageism, just a fact, or you are a little weird). This creates a marketing challenge.
The Idea - Build Titan.com For Alternative Properties - Titan is a mobile-first investment platform that lets unaccredited investors invest in hedge-fund-like opportunities. They have done well. Raising $70M since its founding in 2018.
You could build the Titan for Alternative Properties (RV Parks, Parking Lots, Boat Slips, Land Rentals, etc.).
The Strategy: Deploy the asset fractionalization playbook we discussed above across a diverse portfolio of alt-real estate products—old-faithful but unsexy assets.
The basked of investments approach allows you to market the broader portfolio of products, reliable cash flow, and great user experience - instead of…well…showing a picture of a field for lease.
This doesn’t necessarily inspire “I must invest” levels of enthusiasm…
Here is how you could do a proof of concept test to start:
- Identify a tried and true asset with solid and stable returns like a parking lot or RV storage park.
- Put together a pitch deck booklet that you mail to your network (this screams quality) with a case study on how these assets traditionally cash flow. Include a note about fractionalization and how this strategy broadens the market.
- Raise the seed money necessary to purchase this asset
- Purchase and manage the asset into positive cash flow.
- Deploy the fractionalization strategy above, opening the asset class to many more investments.
- Monitor results. If strong, get more money.
- Rinse and repeat
I hope this got you thinking. See you next week! ✌️