How to turn 1 rental into 8 rentals (and massively increase cash flow)

0:00So I I guess I got to separate two hats here I have my pad split hat where I'm the pad split founder CEO but I've also been in this business as an investor for a long time so I I started buying single family rental properties in 2008 I started buying rent by the room and apartments in 2009 and have done commercial as well so putting on my my investor hat for a moment I I Target and I I try to be local so I'm I'm more or less entirely in the Atlanta metro area and generally pretty pretty close into town I Target the affordable Workforce segment so think anybody who works at the airport that is not the pilot think anybody who

0:49Is working in a hotel anybody who works in retail anybody who who works in some sort of administrative capacity or security guards is is another example like who who's the kind of that core Workforce that is going to be highly motivated to find a place to live that is relatively close to their place of work they're going to work in person so they're not typically remote workers they're not typically students but they can't they they earn money but they don't qualify to get a traditional one-bedroom apartment whether that's because the deposit is too expensive or the rent is too expensive relative to what their income is and so my thesis as an investor is that like there is a huge pool of of people to choose from

1:37That are going to be super attracted to Affordable flexible room situations that are close to work and so that's that's who my target is and the types of homes that I then go look for are the ones that are close to those major employment centers or services that I know those people are going to need so close to hospitals close to airports close to public Transportation and then I design the those homes to be outfitted with the amenities that that those people are generally looking for in most cases it's not a lot right I mean they want Clean safe affordable is is is really what they're targeting they want a place that they can come home to that's quiet that they can either watch TV in their room or just get a

2:26Little bit of sleep before they go work their second job or or or whatever their their case happens to be but also close to public transportation is something that I Target the the caveat here is like there are some hosts who their Target customer is a traveling nurse or a flight attendant and and or student or retiree and like they want to curate a special Community experience and both of those things are are capable on the platform so like the suite of services that pads split provides to me as a host or someone who's targeting just a higher end demographic that's maybe more interested in flexibility than affordability or just amenities at a

3:14At a slightly higher price those properties are going to look different and it's what I what I would say universally is like look if you have a beachfront home on the the Gulf Coast of Florida or on the west coast like you're always going to be better off doing short-term rental in those in those situations if you have like this amazing mountain home with 360 degree views like yeah you're it's it's a shortterm rental but for for the homes that you're looking for for this strategy it could be I am in maybe the middle of nowhere but really close to an Amazon distribution facility and I know there's no housing there

4:03it could just as equally be I am in a class B or C neighborhood really close to an airport I have a new construction home that we built a few years ago that is on a major two double yellow line thoroughfare right next to a gas station that lot would not have been attractive to most any other investor but I could build a duplex pad split on it and and it it cash flows like a machine and I mean it does incredibly well it's close to the airport there's a bus stop literally right in front of the property and so you don't need a lot of parking but it's it's a phenomenal location and so it depends a little bit on what your target is but for me I always think the base of the pyramid is the widest

4:53where where can I provide value for that Workforce segment who I know they have employment and they have stable employment in a lot of cases or they have retirement income and you can be close to those services or public transportation where somebody making 30 to $35,000 a year is just going to find a lot of value in these nicely furnished rooms compared to running a really crappy apartment with a high deposit and where they're going to just take advantage of you on rent increases every single year or whenever they can yeah that totally makes sense what is the the average like monthly rent for for something like that for for a room like that yeah so

5:41On a monthly basis right now it's probably 790 give or take okay and that includes furniture all utilities Wi-Fi typically laundry we provide access to Tele medicine for those customers if they need it and then we also use a third party group called isusu to report on Time payments to credit bureaus so that they can see their their FICO scores increase as well got it okay so and what's The Sweet Spot in terms of number of bedrooms typically do you see depends who you ask yeah for for me it's six to eight okay what what you find is in the way this business works is like short-term rentals are the the fractionalization of real estate by time right it's you pay a lot more

6:29To stay three days at a place than you would if you had a 12-month lease well for for pad split and co- living it's the fractionalization of space and so when you total up what it cost to rent one bedroom it ends up being a much greater income generating opportunity rather than renting the entire property itself yeah right if you think about how the traditional rental market works you have your first bedroom which is really the only one that's market rate but it's it's by far the highest rent per square foot and then the second bedroom is not worth the same as the first the third bedroom is not worth the same as the second so forth and so on to the point where you get to the fourth or fifth Property and or fourth or fifth bedroom rather

7:18And like there's not really any difference between running a five-bedroom house or a four-bedroom house so for pad split what what changes is well you can you can make that first first bedroom more of a of a value for the customer by saying I'm going to price it 70% of whatever a one-bedroom apartment or studio apartment would cost but the second bedroom's worth the same third bedroom's worth the same etc etc so the more bedrooms you have look at this on a spreadsheet you're like oh my gosh there's incredible Revenue generating opportunity here which is how on average every host earns 2x greater net operating income even after our expenses after Property Management compared to a long-term rental so for people who are looking to

8:07Generate long-term Revenue to cover their income and leave their job like this is an outstanding opportunity and in my opinion the best out there which is why I started doing it years and years ago long before I ever started pad split was recommending this strategy Circa like 2012 onwards was because I was comparing my pnls of long-term rental multif family and single family compared to this rent by the room thing and it was super evident that these rent by the rooms just beat the pants off of every other strategy so like as you look at the the ideal number of bedrooms you want enough where you can really increase that that yield comparatively to whatever you could rent it for in a traditional way or even a short-term rental

8:56But not so many that the man management or the Human Relationships inside become just onerous and to me that's 6 to8 with that said I mean we have some hosts who like 10 bedrooms we have some hosts who do three right and usually the ones who are doing three or four they have an existing Airbnb that might not be on the beach or at the top of the mountain and it's just kind of in a b location that's not getting occupancy or doesn't have five star reviews and they find that by converting it they can increase their net operating income just because of the consistency that they have nights filled right where we know that on average a resident here

9:44In Atlanta is going to stay 9.3 months so even if you even if you book that quote nightly rate much lower when you know that it's filled that much more and you're renting by the bedroom your net is significantly higher than it would be even under a short-term rental and so they will just switch from a furnished Airbnb unit to a furnish pad split unit even at three bedrooms and it still it still works but it really depends on on the user and the host and what their what their strategy is I have some host who swear by four or five bedrooms and just like try to push long-term residency and high retention tenants and and others who like more is always better and I I

10:33I've long been kind of in the middle and and for me it's always been six to eight and that's that's where we we see a lot of really good outcomes both from the host standpoint and the and the member experience yeah yeah that makes sense and you can see why I mean if you start multiplying the average of you know 700 and something do per month times eight you know you're you're in the $8,000 a month you know income oh yeah and you could you could easily be 1,200 13 $1,500 a month for for a bedroom in a lot of markets as well wow yeah that's that's pretty incredible and so where I I guess I don't see a whole lot of eight bedrooms advertised you know unless it's a mansion so how does that work do do

11:21Most people convert living space to bedrooms is that how it works yeah they do I mean the question I ask people is especially if you're in the long-term rental business and if the if the goal is you want to create enough rental Revenue to literally live off of it if you're running a long-term rental how much have you gotten paid in rent for your formal dining room yeah yeah pretty much nothing nothing like zero zero how about how about the second living room or the the family room like nothing right the answer is zero and so I you use especially like a home office or formal dining room as really easy points of comparison because what's the difference between a formal dining room and a bedroom usually

12:10It's like furniture and may maybe a closet maybe not door and a door yeah so what's your cost to make that conversion and put in a door you weren't providing the furniture so let's say the a furniture on on average for an individual bedroom is going to be like $1,000 or less and you can go on Amazon shopping list right now and find full bedroom set furniture with mattress and everything for 650 bucks so installed $1,000 maybe you spend 1,500 bucks on just converting the door in the space and changing the chandelier to a ceiling fan or or what have you so let's just let's just say it's $2,500 to

12:59Convert that space and now you're you're renting it out for $800 a month well does that sound like a good investment if you're interested in creating enough Revenue to live off it's pretty hard to beat that anywhere and so that's what people do is they will they'll convert those spaces that are underutilized and completely unmonetized and actually build new housing inventory W the other the the other thing I think that this is important point to touch on is that like we have housing shortage in this country that is putting people out on the streets that have full-time jobs and yet we have all of this space in single family homes that

13:47is unmonetized and unused and completely wasted for all intents and purposes well you just created if you converted that formal dining room for $2,500 you created a new living unit for the largest segment of the demographic demographic segment of the population in the country and compare that to the average subsidy required to build a new apartment which is like $250,000 okay so for one1 100th of the cost you just created a unit and instead of taking three to four years it took you like a weekend I mean that just like both for your bottom line and for taxpayers and the country as a whole and

14:36And again I felt this way long before padsplit which is why I started the company is this just makes way more sense for everybody involved than the current way that that we are creating housing right now and lo and behold if you're if you are so inclined to be an entrepreneur or investor who is looking to to create enough income to live off of this is a much more efficient way to do it