Underweight: Vertical Tiny Homes from Stackhouse

Key Stats:

Summary

The Stackhouse team has been selected as an “Underweighted Deal” by KingsCrowd. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com.

Problem

Housing is not cheap in many parts of the US. This is partly due to home prices rising faster than inflation. In 2016 alone, house prices rose twice as fast as inflation. And the issue of affordability only increases when you focus on the coasts. Another issue in housing is sustainability. Many of the processes and materials used in home construction can be hazardous for the environment. Even so, housing counts continue to grow because it’s necessary to meet the needs of a growing population in the US. Owning a home is also seen as a major method of wealth generation for many families.

Solution

One company that believes it has the answer to these problems is Stackhouse. Founded by Janelle Briggs and Ryan Egan, Stackhouse is focused on creating a new way of living: stackable shipping container homes. Shipping containers as homes have been a popular trend in recent years. But the idea of creating a community where they are stacked together on a large steel-and-concrete platform is a new twist.

For a price as low as $45,000, Stackhouse can build shipping container homes (for comparison, the median cost of a home in 2000 was almost $120,000). These homes are ideal for individuals and families who are looking for cheap, portable housing options. Because the frame is a fixed structure that utilizes COR-TEN steel, the initial cost of the housing is cheap. The bulk of the expense comes from decorating the home and furnishing it. Management already has plans for a studio option, a one-bedroom option, and a two-bedroom option. Each unit is 320 square feet. Stackhouse intends to sell these homes to anyone who wants one. Individuals can buy a Stackhouse home and place it where they like. This is a common strategy employed by most tiny home manufacturers. The key concept that makes Stackhouse different, though, is its goal to stack the homes together to create a community.

At first glance, this idea may seem out from left field, but the tiny home movement has quite a following. Management claims that 29 of the 50 units they have planned for their first site in Tucson, Arizona are already backed by paid reservations. The property has also been purchased by the business, and they have a partner in Texas willing and able to manufacture the homes for them. If things go well in this initial location, Stackhouse has plans to expand to 25 cities by 2025, with the goal of going international by 2030.

To appeal to community-oriented tenants, Stackhouse has some big plans. It wants to offer various amenities for its members. Examples provided by management include balconies and private patios and BBQ/entertainment areas. Parking and property management will also be included as part of the deal. Tenants also have the freedom to leave the community too. This might appeal to those interested in taking their home on the road and experiencing different parts of the country. With communities planned across the US, the goal would be to ensure the company’s homebuyers that they always have a place to connect that’s simple and affordable.

In order to generate revenue, Stackhouse intends to sell the homes. But that will probably account for a small portion of the business’ sales over time. The real money is in charging a monthly membership fee to residents of the community. When a shipping container home is inserted on a floor of the platform, it can connect to all of the utilities it needs. This includes water, electricity, trash, internet, and parking. All of these utilities will be included in the monthly fee. Management estimates this cost will be about 10% lower than the market rate for traditional properties of similar size. As an example, management said that the average fee for a third-floor unit might be around $1,100 per month. The company has plans for other revenue-generating activities down the road. These activities include transportation management and licensing out its patent-pending technology. The firm is currently seeking out patents centered around its building design and container lift mechanism.

Though this concept sounds exciting, it’s important to remember that Stackhouse is still very much in its early stages. Revenue in 2018 was $0. In 2019, the company’s revenue was just $2,600, and all of that came from non-refundable reservations. Last year, the business lost $14,822, far greater than the $2,013 loss incurred a year earlier. Operating cash flows matched net losses in both years. The firm did have $120,000 in notes payable on its books, but this is supported by property (presumably its acquired site) worth $126,048.

An Opaque Market

The tiny home market has captured a lot of attention in recent years, particularly with younger home-buyers. Instead of owning a large home full of ‘things’, the thinking goes, you can live with what you need and use the extra time and money to spend on experiences. Part of this transition is certainly due to financial pressures put on young adults. Rising housing costs and record levels of student loans have made the emphasis on budget properties all but necessary. These are unlikely the only factors contributing to this paradigm shift though. It should be viewed as no mere coincidence that the advent of tiny home living is occurring after decades of rampant materialism.

Even though many people have taken up the tiny living torch, data on the market is difficult to come by. This is especially true of the niche space that shipping container homes occupy. One source we found estimates that the opportunity, globally, was worth about $44.77 billion in 2017. It forecast that the market should grow at a rate of about 6.5% per annum through 2025. By that point, the market should be around $73.07 billion in size. Using these figures, the market this year should be worth about $54.08 billion.

Terms of the Deal

Management has big plans, but with big plans come big costs. In all, Stackhouse estimates that building out their first site will cost $3.3 million. The firm already has a company willing to lend it the money to fund the bulk of the project, but to cover the rest it wants to raise capital. The goal is to raise up to $1.07 million, but the company will accept a round as little as $100,000. To participate in the deal, investors must contribute a minimum of $100 apiece. In exchange they will receive a convertible note that will convert into common stock at a 20% discount to the firm’s future valuation. This is subject to a valuation cap of $5 million for the business. Investors who contribute part of the first $200,000 to the deal will be eligible to reserve one of the first three site’s remaining units for just $1,000. After this point, the price of a reservation goes up to $5,000. The convertible notes naturally mature in 24 months and carry an annual interest rate of 8%.  As of this writing, the company has received commitments totaling just $72,561.  

An Eye on Management

For how early-stage Stackhouse is, the company has an extensive group of individuals working on the business. It is important, though, to focus on the two founders. The primary founder and the company’s current CEO is Janelle Briggs. Prior to starting Stackhouse, Briggs worked as an Academic Counselor at the University of Louisiana at Monroe. She carries a PhD in Speech Communication and Rhetoric from the Southern Illinois University at Carbondale. The other founder behind Stackhouse is Ryan Egan, the firm’s COO. Egan has worked in the past as a Designated Broker and Owner at A Rising Tide Realty, which focuses on real estate in Tucson. In the past, he was a Retail Specialist at Prime Commercial Real Estate, and before that he worked as a Senior Facilities Manager at Brake Masters.

Rating

Upon a review of all the data available, we have rated Stackhouse as an Underweight Deal. The industry, though opaque, does seem to offer some nice upside. Add to this the emphasis on addressing high housing costs, and the business model is logical. Having said that, there are too many issues at play here. Manufacturing and selling shipping container homes is hardly new. Countless firms across the US and in other parts of the world do it every day. The idea of vertically stacking them on a platform appears novel. But it remains to be seen how many people would actually be willing to live in that setting.

These issues might be overlooked if not for another big problem: traction. Yes, management has acquired a property and it does have reservations and relevant strategic partners. But with reservations as small as they are, there’s no telling how many of these will convert into paying tenants. If management is as serious as they claim to be, they could at least generate some nice traction by selling their shipping container homes to individuals who are not planning to be part of the community. Presumably the hurdle here would be far lower than the $3.3 million the firm will need to invest in this community concept. Once they establish some revenue on this front, they could segue into this community idea. As it stands now, though, the lack of traction makes this a risky endeavor.