Industry Profile – Sahil Gupta
CEO & Co-founder, Patch Homes
Sahil Gupta is co-founder and CEO of Bay Area-based Patch Homes, a consumer-finance platform that helps homeowners access credit and investors tap into high-growth U.S. housing markets in a distributed, diversified way.
Gupta cites three macro trends fueling Patch Homes’s relevance to homeowners: a stable and growing residential housing market; a 50% reduction in home equity loans and HELOCs (home equity line of credit) to homeowners since the financial crisis; and a historically low savings rate combined with high personal debt. “A lot of homeowners today are asset-rich but cash-strapped,” Gupta notes. “On average, 67% of homeowner wealth is trapped in home equity with no way to tap it except leveraging the home.”
Rather than charging interest or burdening consumers with monthly payments, Patch Homes “replaces a debt-based financing model with a partnership-based model,” as Gupta puts it. In exchange for credit, homeowners agree to share the future upside or downside of their home value with Patch Homes.
Gupta’s path into the financial technology world started when he left his native India to earn a Master’s in Computational Finance at Carnegie Mellon. He joined Mellon Capital’s asset management group after graduation, focusing on managing capital for pension and endowment funds. During his time at Mellon, Gupta realized the importance of automating processes for greater transparency and efficiency. He then left Mellon in early 2011 to join Motif Investing as a founding employee of the investment team. At Motif, he helped build an online platform for thematic investment portfolios that reflect investors interests and macroeconomic themes. Under his leadership Motif’s AUM grew to $500+ million over four years, including clients such as Goldman Sachs, General Atlantic, among others. From Motif, he moved to Sliced Investing, a YCombinator-backed startup that provides financial advisors access to unique alternative investments. Gupta and his co-founder, Sundeep Ambati, got the idea for Patch Homes just as Sliced was acquired in early 2016. “Sundeep was looking for a home equity loan,” Gupta recalls. “Here’s someone with good credit and savings, but because he’s shifted from W2 employee to 1099 contractor, banks wouldn’t lend him any money.” Interested in real estate as an asset class, Gupta offered Ambati financing in exchange for sharing in the future home value. “That spurred the idea for Patch Homes,” he says. “There are millions of Sundeeps’ across the country.”
Patch Homes gives qualified investors a unique way to gain exposure to residential real estate—a historically stable asset class across high-growth U.S. markets such as San Francisco Bay Area and Los Angeles. Patch Homes uses proprietary geographic selection models that help identify such regions based on quantitative factors like population, job growth, and income trends, among others. “We’ve created a highly capital-efficient and low-cost way to invest in residential real estate,” Gupta notes.
Consider an investor looking to deploy $10 million to residential U.S. housing in the San Francisco Bay Area. REITs traded on public exchanges offer one possible vehicle, but most of that exposure tracks stock market exposure, not the underlying real estate asset. The beta of REITs to the stock market can be as high as 0.8, so in essence, investors are buying equity exposure and not real estate. Another option is buying real estate directly—but in high-growth areas—“$10 million can buy you a few homes at best,” Gupta notes. “And now all your eggs are in one basket—plus you’re on the hook for property taxes, insurance, and maintenance costs, with zero diversification.” Patch Homes enables the same investor to split that capital over 100+ Patch Contracts—the typical homeowner investment amount being $100,000. Investors can buy 100+ Patch Contracts in neighborhoods distributed across any real estate market, including the ability to target certain counties and zip-codes using Patch Homes acquisition models. Patch Homes enables investors to “own fractional pieces of high-quality residential real estate,” Gupta says. “It’s a low-touch, streamlined, diversified form of real estate investing.”
Patch Contracts are issued in in 3-, 7- or standard 10-year maturities. Homeowners must payout Patch Homes at maturity. However, we have noticed a tendency for them to prepay: either when they sell their homes or experience a cash-out liquidity event of their own, like a home refinance or startup exit. “The U.S. real estate market can be attractive to domestic and foreign investors alike,” Gupta says. “It’s an unconstrained investment opportunity backed by a hard asset like single-family homes. Residential real estate is often viewed as an ideal hedge against inflation risk. It also has tended to attract pensions, endowments, and insurance companies as a possible hedge against the longer-dated liabilities these investors often have.”
While traditional real estate portfolios provide investors with cash flow at intermittent periods of time, Patch Homes’s algorithmic underwriting models, analytics and data-driven risk management are designed to predict which Patch Contracts will pay back each year. As a result, “the investor’s experience a more predictable and consistent cash flow,” Gupta says. Investors receive quarterly distributions after the first two years of capital deployment.
Patch Homes is initially focused on 12+ million homeowners with good financial profiles in high-quality areas nationally, with $1.1 trillion in untapped home equity. They’ve been deploying capital across California over the past year, with plans to expand to Seattle, Tacoma, and New York after that.