A company that started with one guy trying to help his friend buy a house has just reached $312 million in a mix of debt and equity funding.
Founded in 2017, Up&Up, which aims to help renters accrue wealth during the duration of their tenancy, announces today their latest raise of $275 million. Khosala Ventures led the round, with previous round leader Founders Fund also participating on the venture side. Goldman Sachs, Rialto Capital and L2 point were investors on the real estate capital side.
“We’re excited to take this capital on the real estate side and grow into meaningfully more markets and effect meaningfully more renters”, says co-founder Michael Wong. “Then on the venture side to build the machine that can make this thing happen.”
To date Up&Up has spent $50 million acquiring approximately 300 properties in two markets–Atlanta and St. Louis–with the intention of using the latest infusion to expand within those cities as well as around the country. The math works out to about $167,000 per home. The average rent for users on their platform is $1,400, for a portfolio made up of mostly two-and three-bedroom single-family homes, says co-founder Michael Wong.
“As we piece together the marketplace we’re starting with lower priced homes with higher yields in these markets with lower price. That’s what driving these $1,400 rents,” explains Wong, adding the company is “looking to expand as quickly as we can to more cities across the country.”
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Up&Up aims to build wealth for renters for the duration of their tenancy by having them benefit from the price appreciation of the property where they live. The model relies on a digital wallet where renters contribute an initial deposit equal to two months rent as well as a required monthly contribution, currently set at a minimum of $100 per month. Each month Up&Up determines the valuation of the home and any profits, less required maintenance costs, are added to the renter’s wallet.
“We are trying to reframe the rental journey by making these rent payments wealth-generating, not wealth-depleting,” says Wong. He shares that the existing user base, made up of approximately 300 leases, has reached an average balance of $7,400 in their wallets over the past two years, with contributions averaging $4,300.
If a renter wishes to purchase the home they’re renting or another from the Up&Up portfolio they can use the funds in their wallet towards the cost of the purchase. If they want the money returned to them instead of purchasing an Up&Up property, they receive 90% of the balance. Renters must agree to a two-year lease and can contribute as much as they want above the required monthly contribution. As the FAQs on their website explain the monthly contribution, “If you’re looking for a rental that doesn’t include this option, working with Up&Up might not be the right choice for you.”
“It’s much more about allowing renters to participate in these decades of wealth generation in real estate in their journey through housing. As opposed to accelerating their home purchase by a year or two,” explains Wong.
Like many other large-scale property-centric asset management companies, Up&Up has developed their own approach to the challenge of coming up with accurate valuations for a home price. With the recent news that Zillow has exited their iBuyer program, in part because of the volatility in the automatic valuation models, the pressure is on the remaining players in this industry to prove their methods are accurate enough to ensure the predicted profit margin comes true years into the future.
“We heavily invest in data and software to choose what submarkets we’re interested in, what housing types we’re interested in that fit our customer demands [and] our investor demand,” says Wong, citing indices from FHFA and Zillow, third party broker price opinions and neighborhood information as some of the data the company purchases to feed into their own proprietary model to determine valuations.
Wong agrees there are challenges with the accuracy of valuation models that exist and explains if there’s any disagreement when it comes time to for a renter to buy they will have a third party appraisal, adding, “We get to avoid a lot of the transaction fees that are out there on the market so there should be enough room for everyone to be happy.”
With their latest funding round, the company’s immediate emphasis will be on purchasing single-family homes instead of townhouses or condos since, as Wong says, “To get the aligned incentives right you have to have a customer focused on the ability to buy their specific home. Condo rules are more complex.”
Wong further details Up&Up’s philosophy of ‘aligned incentives’ between investors and users of their platform by saying, “It’s the idea of a fair deal. We’ve designed a program that is just as rewarding to be a renter as a property owner. That’s the thing that we believe can become a new modality of housing.”