Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
Giri Devanur, the CEO of reAlpha, a “real estate investing start-up that is looking to democratize the $1.2 trillion short-term rental market and create accessible investing opportunities for Main Street,” joined the 7investing podcast to talk about his company and the real estate market in general.
September 3, 2021 – By Samantha Bailey
Giri Devanur, the CEO of reAlpha, a “real estate investing start-up that is looking to democratize the $1.2 trillion short-term rental market and create accessible investing opportunities for Main Street,” joined the 7investing podcast to talk about his company and the real estate market in general. Devanur has led multiple companies
reAlpha uses Registration A or “Reg A” financing to allow regular people (i.e. non-accredited investors) to own fractional shares or rental properties. It’s a new model that the company has been pioneering at a time when the real estate market has been incredibly volatile.
At its heart, reAlpha is both a real estate investment company and a technology play. The company uses technology to identify the properties it plans to buy and to uncover opportunities in this fast-changing market. Devanur sat down with Dan Kline to discuss the genesis of reAlpha, his own long history of success, and empowering more people to invest in short-term rental real estate.
1:08 Meet Giri Devanur
2:41 What is reAlpha and what is Reg A financing?
5:01 A new way to invest in short-term rental real estate
8:12 The role of artificial intelligence
10:26 Buying real estate in a hyper-competitive market
11:51 The difference in buying as an investor
13:05 Going long on America
14:57 How do you approach volatility?
15:55 The impact of local laws on short-term rentals
17:23 What will laws look like in the future?
18:25 Creating workforce opportunities
19:43 Can this model work in other countries?
20:36 How do you cash out from a Reg A company?
21:38 Giri’s future plans
22:38 Empowering people to invest in real estate
23:49 Changing the discussion on investing
Dan Kline 0:02
Welcome to the 7Investing podcast. My name of course is Daniel Kline. I’m being joined today by Giri Devanur are the CEO of reAlpha. That may not be a company you’ve ever heard of, but I’ll give you their description. There are real estate investing startup that is looking to democratize the $1.2 trillion short term rental market and create accessible investing opportunities for main street. Giri, welcome to the 7Investing podcast.
Giri Devanur 0:29
Hey, Dan, thank you very much for your intro.
Dan Kline 0:32
Very excited to have you here. Because as fans of the show people who watch us on 7Investing now know it’s been a very strange time. For real estate, we’ve seen a values where I live in West Palm Beach for single family homes roughly double. I saw my brother who was living in Miami for much of the pandemic have to move like every two weeks because he couldn’t find a short term rental he was in and out of corporate housing and hotels. It has been a very strange time we’re going to get to the real estate market. But before we do that, I think it’s really important to establish what reAlpha does and sort of what your logic was, you know, in creating the company.
Giri Devanur 1:08
Alright, so a quick intro about myself. So that gives you the context. I’ve been a tech guy. This is my sixth startup. I’ve been through, you know, multiple different kinds of tech. My previous company, I took it from zero to $50 million revenue in under four years, we got listed on NASDAQ. After I rang the bell, I said I’m going to do something else. Before that I had done 1000 plus people tech company between Bay Area and Bangalore in India. So no Tech has been my passion all my life. So after I rang the bell on NASDAQ, I thought I’m going to do something else. Right. So I decided to move to Columbus, Ohio. Now from Princeton, I used to live in Princeton, and because of COVID eyes, I said, I’m gonna now go elsewhere.
I moved here. And then you know, when I was thinking about what to do next, one of my friends, she called me from Princeton, she was trying to buy an investment property like you. That was a $400,000 home. So, you know, like banks were expecting her to put 25%, which is $100,000 down. She did not have 100,000. So she called me saying getting can you know, like, either give me $100,000 dollars? Or give me I mean, find a solution. So I wore my tech hat and I said, I’m going to try and solve it through tech, right? That is the origin of reAlpha. ReAlpha means reimagining alpha. Alpha is the yield all your listeners know, how do you beat that? Right? That’s the theses about reAlpha. So far, we have figured out four alphas, I will talk you know more about those as we move forward.
Dan Kline 2:58
Sure, absolutely. So you’re using what’s called reg a or regulation, a financing. It’s a different way to purchase anything, why don’t you explain it a little bit, because that’s not one I was that familiar with, I think I’ve probably done shows on it before, but it was not one that popped up into the top of my head here.
Giri Devanur 3:14
So you know, like in 2015 JOBS Act was passed. And, you know, like, when the JOBS Act was passed by the Congress, what the writers of that regulation did was to allow unaccredited investors to get into fast growing companies. In the good old days, if you wanted to invest, let’s say, in Airbnb itself, you know, meet your user as well as an investor right. So, now, like, if you wanted to get in when they were early stage company, you had no choice. Either you had to be a VC or had connections and stuff like that. What Regulation A has done is it has removed that barrier. You can enter into you know, like early stage, you know, highly promising companies at the ground floor level not at the IPO, which is the 100th floor level.
Dan Kline 4:06
So, people who are investing are they buying shares of individual properties, are they buying shares of the company, give me a little more detail here.
Giri Devanur 4:13
So, through the Regulation A you will be you know, in buying into all the properties, so, you know, you are buying in the equity of the company, but you know, like if you are coming in at a property level, then you know, you will be investing in only that property.
Dan Kline 4:27
So, you can sort of do either like you could you could invest in a property, you could invest in the company, and if you invest in the property or multiple people investing in each property, and they have some ownership rights, right?
Giri Devanur 4:40
Say No, like our core mission of reAlpha is to democratize. Airbnb type in short term rental investment. So in order to do that, what we are doing is we are allowing people to invest in all the properties where they don’t have to take the risk of one property. It’s like a portfolio theory, right? So you bring, you know, at a portfolio, or you come in at one property level, wherein you know that you can own up to 12 and a quarter percent, for as low as $3500. So we are brought it down to that level, but our mission is to eventually figure out how do we make our community members to come in at as the as low as zero investment? Kind of, that’s our core mission. We haven’t come there yet. But you know, we are coming there soon.
Dan Kline 5:29
I feel like you want to ask for a few dollars that zero, it’s probably a little a little too low. But I understand the concept.
Giri Devanur 5:38
Like, why does surprise me is when I was digging into that data, more than 60% of Americans don’t have $5,000 in their bank account, to you know, handle emergencies. How do we enable such kind of, you know, large population who have more access to buying properties, investing properties, etc? How do you help them create assets, that’s our mission.
Dan Kline 6:02
So that’s our mission as well, that is a very complimentary, so what we’re trying to do at 7Investing is bring investing knowledge to people who might not think you can invest now, because of no commission trading because of fractional shares. You could put $5 a week in an investing account, and get to see. I have my son who is has his first job, he’s 17 years old, put 30% of his paycheck into a Stockpile account, which is a brokerage account, and he just started working. And when he gets home today, or tomorrow, we’re going to go through and pick Okay, I want to own a little piece of Amazon, I want to own a little whatever it is, whenever companies, you know, I’ll steer him away from ones that are companies he likes that maybe aren’t good investments. But we’ll go through that process.
And what’s neat about it, and what we try to do at 7Investing is show you that if you can have that. So you’re doing that on a real estate level, I know how difficult it is to buy real estate. I’ve been self employed for decades, that adds a certain added level of complexity. And to buy our property, we actually sold our principal residence which didn’t work for us during the pandemic, and bought a property for cash. So let’s talk about the market right now. The reason I tell that story is you cannot buy a short term rental property in the under $300,000 category in the Orlando area, if you don’t have cash. So that takes something that’s already a small market, and makes it a very small market. How do you identify, you know, value? And, you know, we’re the property we purchased three months ago is were $60,000 more based on what’s being sold in a day now. So how is a company, are you sort of using technology to figure out what to buy?
Giri Devanur 7:40
Yeah, so another thing again, you know, I was not aware of the wholesale market, etc, you know, before I got into reAlpha, and then, you know, we discovered our co founder, Monaz she has done 100% properties herself. So you know, she brings that in depth knowledge of the industry. Our chairman, you know, he has done thousands of properties, Brent Crawford. So between their teams, we have large institutional knowledge of how to buy those kind of properties. From a pure tech perspective, what we do then is, we have built a AI platform, we call it as the alpha brain. So how do you so what we do is we bring in hundreds of property data into brain and then pick and choose the right ones from Airbnb viability perspective. So what happens is, most of the people, even the ones who have the ability to buy such kind of properties, they go and make very subjective decisions. Right? So when I’m buying and sell in our mind, if it is an investment property, you should not make it based on Oh, I like the neighborhood or I like the property and then just buy it.
We believe that it has to be systematic technology driven unemotional decision, so that you don’t burn your fingers, right? I have met a bunch of my friends, Oh, I like this neighborhood and buy a property and then get started. And then you know, like, Airbnb viability will not be there. And hence, they end up pumping in money, money monthly, you know, month after month at times, right? So, what we have done is there are 29 elements that our algorithm now looks at it. Like what is the neighborhood school rating? What is the crime rate? How far is it from a Starbucks and you know, you’re drinking coffee that reminded me So, you know, like elements like that all of them will be in analyzed by our system, and then it generates what we call as reAlpha score, that is what is used to buy such kind of properties.
Dan Kline 9:42
So I am drinking vodka by that. No, I’m kidding. I am. I am. I am drinking water in my mug here. It is too late in the day for coffee. But I will say that the factors you just listed are all factors I personally used. How far is a Starbucks is absolutely one of the things. So I didn’t use tech. But I made a spreadsheet of things I want, but it was emotional, because we use our property. So yes, it is a rental. Ideally, I will make money on it over the course of the year. And I will because it’s rented out for most of the winter to some snowbirds. But my, it had to work for me as well. So are you going to get a better deal because you can sort of divorce yourself from the, you know, the things like, like, we didn’t like the couches, and that was like an absolute factor. And we’ve since replaced them. But you don’t have to think about that. Right? If you’re pulling in the data and the rental track record.
Giri Devanur 10:38
Say again, you know, see if you’re able to you know, go 200 properties and visit and then make a decision, you will not be able to not decide on a property, most people will reach the fatigue level after 10 or 15 properties. Ability to analyze hundreds of properties within a minute, within within a few seconds is what which will literally separate us from the crowd of buyers, right. There is a large number of people. So we what we have done is when we work with our community members to buy those kind of properties. Once we buy it, we allow our community members to stay in those properties as well. Because we our financial model, we assume 65% occupancy rate, and 35%, we are giving it to our members to you know, either they themselves can use it or give it to their friends and family so that people can go and stay there.
Dan Kline 11:36
A similar model to what we use in terms of letting friends and family stay, though I have -b
Giri Devanur 11:42
We are doing it a large scale.
Dan Kline 11:44
Yeah. And so when you purchase a prop up a property, we both know, prices have been escalating, especially now, this market in Florida is obviously not unique. We’re seeing prices go up in many tourism areas. But when you’re buying does a higher price, just change the payback terms and not necessarily impact whether or not you should buy it because for me, there’s a hard dollar figure that’s all I have. For you if you spend 280 versus 260, does that just extend your payback by four months? Or whatever the number is?
Giri Devanur 12:17
See No, like, again, you know, I have a very simple mantra that you use. I am always long on America, you know, you should be always long on America. Right? So American economy in both has ups and downs. You and I are old enough to have seen, you know, a couple of crashes in our career. What I believe is yes, you know, like, it’s a little exaggerated at this point in time. But is it you know, going to crash like the 2008? I don’t believe so. Because the the systems and the the regulations that came in after the 2008 you know, crash, they protect, you know, the banks that way. I mean, getting a bank loan is you know, almost as hard as you know, pulling your teeth, you know, kind of situation, right. So what we believe is market is slightly overheated not denying it. But if you take a long term view, you know, 10 years, 20 years kind of view, this will get adjusted over a longer period of time. But again, I’m very long on America, in the long term. And I’m going to get worried, what is going to happen to X number of properties in the next three months, six months, maybe even a year? No, no, you should take a long term investment approach.
Dan Kline 13:34
No I fully agree with you, we see people make that comparison. And in 2007, I did a no doc stated income loan with a builder at a time that I owned another property and I was intending to sell it, but it was not contingent. And that was way more money than anyone should have been loaning me at that time. Whereas now where I have a very stable track record, as a homeowner, a nice bank account, a good income. I’ve lined up a mortgage to buy a house, but I had to do a bank, you know, bank statement. It is a broken system, but it is much more difficult.
And we also have real population shift. And I think that’s, that’s important to know. People buying houses they couldn’t afford is very different than someone selling their very expensive New York home, at which point what you spend in Florida almost doesn’t matter. We sold to our principal condo to someone in New Jersey. And I’m not entirely sure if they paid 100 grand more would have been that big a difference when they were likely moving from something very expensive. That’s me talking way too much. But I think it’s important to point out to the viewer that much like we talked about how the tech crash of the 90s was advertising related. There wasn’t any and there wasn’t cloud computing that this is very, very different. But so how do you approach. Is it geographic diversity because I know that my property was booked for all of July and does not have a booking now until November. Now likely it will look out for for Thanksgiving and Christmas. And I have a very low cost so it’s not that important. But if you have like a market like Florida, which right now is stalled out a little bit for the reasons that are obvious that we don’t talk about that much. How do you deal with that? Like, how is a company? Do you sort of bake in that happening?
Giri Devanur 15:21
Yeah. So you know, like, again, you know, when we analyze a market, we look at both macro and micro level details. So in a macro is, how is the overall real estate behaving versus, you know, like, short term rental. What is the demand supply, etc. There are multiple elements that go into that kind of decision making. At the property level. It’s very local, right, you know, like, what is the short term rental regulation in that market? You know, like, it varies town to town at times, right? Again, in your state, Florida, Florida Supreme Court has to take a call because there are some cities have gone fully in favor, some cities have gone against it, etc. These kind of, you know, tussle will always happen. See, you and I have seen how Uber was eventually, you know, in the world in 2011 12, etc, more cities banned Uber, because of the pressure from the taxi medallion lobby, right? In New York, you know, they couldn’t enter certain streets. Eventually, what happens is the consumer demand, which will you know, like, eventually make the politicians to come around and the regulations to get formed in the right way. For example, you know, you are in Orlando area where Kissimmee is a big market, right? You know, there are 44,000 short term rental homes. So like that every market will have its own upset, right?
Dan Kline 16:48
Where, whereas celebration, next door has exactly one building that that has short term rentals. And here in West Palm Beach, it’s not that common. My previous building had a significant problem with illegal Airbnb’s, but you could legally rent your unit up to 12 times a year, it just had to be for a month. So you could creatively get around some of the rules. But yeah, so as a company, are you are you lobbying? Are you working with Airbnb? Because it can be a challenge when you buy an Airbnb in a market where the rules change, right?
Giri Devanur 17:23
Yeah. So you know, like, what I believe will happen is nobody can retrospectively change the law. US laws are, you know, fairly open, if somebody wants a property, technically, they can do whatever they want. So Dallas did a very interesting twist to the story. They said, doesn’t matter if you’re using it for Airbnb or anything like that pay 7% tax, like a hotel kind of tax, right? I believe in a more and more markets will eventually emerge into that mode, wherein just the way, if you’re running Uber, you will end up paying some kind of tax. Same stuff will happen on Airbnb, and it’ll be like any other commercial venture, right?
Dan Kline 18:08
So once you buy the property, I assume there’s some level of going in and painting and redoing, are you then actually managing the property? Or are you working with management companies?
Giri Devanur 18:18
Yeah, so not right now. We are working with a few management companies. But you know, our core mission is to empower everybody, right. So now, what we are doing is we are creating a fund called reimagine fund, wherein we will be leveraging workforce opportunities, services, etc, to allow underserved communities in the markets that we serve people who did not have a shot at entrepreneurship – we are going to give them the first contract and some capital to start their venture, so that they know they can help us in the entire property management process. So I mean, I came to this country with $65, I believe, you know, like, if somebody can get a small contract and a little bit of capital, they can build their own enterprises. So while we are scaling up, we want to help at least a few 100, maybe a few 1000 micro entrepreneurs to build their businesses.
Dan Kline 19:17
That’s really exciting. Actually, the maintenance company at that’s contracted to our property, is that type of grounds up, you know, sort of story just like someone with a hammer, who started doing handiwork that now has a company with multiple employees. So committing to doing something like that, I think is really, really, really encouraging. Do you see yourself as a US based company or is this exportable to other other markets eventually?
Giri Devanur 19:42
Yeah, right. No, we are a very US centric company, even though our technology marketing etc, you know that we are experts from 14 different countries now. So you know, like, it’s been an amazing growth story. What we believe is Airbnb is operational in 220 countries. So our market is as big as that it’s a $1.2 trillion market. So, you know, we can go to any country that, you know, we think is appropriate for stakeholders.
Dan Kline 20:15
So if I invest, how do I cash out, you know, let’s say I put my money in, and I’m 47 years old. So 25 years from now, I decide I want to retire and cash in some of my investments, how do I do that in this sort of setup.
Giri Devanur 20:28
So, you know, like, initially, you will be investing in through the Regulation A, RegA shares. We are launching it on our website very soon in the I mean, we got the SEC clearance, now, you know, we are waiting for the last filing, etc. Once that is done, you will be legally officially allowed to invest. So you can right now, go to reAlpha.com and, you know, like, join our waitlist, and then, you know, eventually when the SEC lifts the curtain, we’ll be allowed to, you know, take the investment. And at an appropriate time, very quickly, we believe that, you know, we will be you know, getting onto some of the mains stock exchanges. I have had the experience my our management team had the experience of taking companies public. At that time, you know, like you will have the ability to trade as well. We are also considering the Regulation A shares itself to be listed on secondary ETS, that what is called as alternative trading systems, you know, we are going to list on them as well.
Dan Kline 21:31
So, are you at the point it goes public gonna move on to the next thing? I think it’s I think it’s important for people to know if, you know, maybe we should keep you away from ringing the bell. But is this – are you here for a while? Are there people?
Giri Devanur 21:48
Yeah, so you know, like, I have taken a very long call on this, as I told you, I’ve taken a long call on America. So no, this is going to be a much longer. See last time, you know, it was a, I wanted to ring the bell kind of bucket list item kind of stuff. But now we know, like, I believe that, you know, we can truly create great opportunities. Our mission statement is we empower people to invest in Real. See, you know, like, in the last 24 months, 36 months, you have been seen the younger generation to invest in, you know, just digital, and in all the Gamestop and the idea of things I heard on your blog, you know, media, etc. How we know that people, you know, have made only one kind of investment. We believe that it should empower people to invest in Real. We call it as invest in real people, real assets and real moments, right. So, you know, we think that, you know, like, if we can help at least another 1000 micro entrepreneurs to emerge out of our ecosystem. That will be a great day for me. I think this is going to be my last days before, you know, maybe I’ll work with you.
Dan Kline 22:58
Or do you think and it because I do think there were there, you know, as I said before, we have kind of the same mission, just were approaching it from investing. And on one hand, that whole, like, everyone can buy stocks, because of Robinhood was good. On the other hand, you don’t want people to think, Hey, I buy a stock on Monday, and I sell it on Wednesday, and I made a bunch of I lost a bunch of money. Because the one thing we preach is that as an individual investor, you have time on your side if you buy good companies, and that’s largely true with real estate, a lot of people you know, in the investing world will say, well, your home’s not an investment. And to a point it’s not because you live there. On the other hand, it’s also something you pay down the balance of that if you live in a market that’s stable, even if it’s not worth astronomically more you are it’s a piggyback. It is an investment. How do you sort of change the national discussion on investment. There’s no education in schools. There’s no discussion, you don’t even learn how to open a checking account, let alone how to open a brokerage account, or the benefits of buying real estate at a relatively young age. Like how do we change that conversation?
Giri Devanur 24:07
Yeah, see, you know, like, again, you know, what has happened is the younger generation especially and even actually, in, like, middle aged guys don’t even know the value of you know, compounding and, you know, its growth, right? So we believe that, you know, if we can correctly show them that, hey, invest in a property, but you can also go and stay in that property. That’s why you know, like, we are taking only 65% to, you know, be rented and 35%. So, no, like, people will have a pride that I own a vacation home, right? He want to bet on that and push that and then you know, like, we want to you know, make sure that you own the Airbnb revenue, get some, you know, like quarterly dividend, and then you can also go and stay in your own property right. We believe that you know, if we can push that not only equity ownership, you need to take long term view on your assets that you’re trading.
Dan Kline 25:01
And will you have financial disclosures you know, similar to a publicly traded company?
Giri Devanur 25:06
Yes. So I know like with Regulation A it’s almost like a public company. Not as rigorous as a public company I’ve been through you know, taking a company to NASDAQ that journey going through the S1 and you know like quarterly reports etc. Here you know, it will be half yearly reports internal quarterly reports.
Dan Kline 25:26
Giri Devanur, thank you for doing this. This is a company we’re gonna follow because it’s a market that’s developing. I didn’t even know short term rentals was a thing until relatively you know till moving to Florida because it’s it’s not a thing where I grew up in New England except for like ski homes, and things like that. So this is a company we’re going to keep an eye on. Thank you for doing this. Regulation A is something that also is going to be a big topic for us. I will thank your publicity person, Courtney, for setting this up because she always knows the most interesting people I’m going to want to talk to. So that is the 7investing podcast. We will see you in a couple of days. We do this every Tuesday and every Thursday. We are 7investing empowering you to invest in your future.
Giri Devanur 26:08
Thank you very much.
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