How Co-Living Creates Affordable Housing and Big Profits

0:00Padsplit is a technology company that helps you fill rooms. Think about it as Airbnb. What does Airbnb do? Well, they help you with the communication to the person staying in your home and they help you fill your your home. Ultimately, they they get the lead. They get the they get the money. That's what Padsplit is. Everybody thinks, "Oh, Padsplit will manage my home." Padsplit does not manage your home. You need to have Padsplit plus a property manager. And so, I want to clarify that. And then Padsplit has a unique model of how they've decided to set out about it. They are doing unfernished I'm sorry they're doing furnished rooms — weekby-week rentals so that people pay by the week and there's no long-term commitment from those people.

0:38Now they're trying to change that so by the time someone listens to this maybe they will have gotten you know they're trying to make people kind of lock them into a room so they don't just bounce to a new room every week. Right. — Got it. But and they also don't do they they're not big into trying to create any community in the home. — Okay. — They're just there's a person. — They need a Yeah. By the week. — And I think that leads to a little bit of like a boarding house kind of short-term rental feel. — So the model that is my preferred model is long-term commitment.

1:11If someone signs for a year unfernished room because I believe the room in America in 10 years will be the new apartment — like people will be like ah like let me save some money I'm just I'm going to get a room instead apartment that'll be very commonly accepted in 10 years like it is here in Europe actually like I'm I'm in Barcelona right now everybody rents a room in Barcelona you know or in Berlin I was in Germany last week it's very very common for people to rent rooms right America it's like it's coming it's just not we're not 100% there quite yet but this trend is taking off we're on the beginning stages of it so that's a little And then I believe in all in in in having common spaces for people to like co-work and eat and hang out and connect.

1:48And so we and we do things to create community in the home. So those are some of the main differences. But I want to be very clear. Padsplit is also helping solve affordable housing. I'm a huge fan of what they're doing. A lot of my students use Padsplit to help fill their homes, but they still manage the home with some of the principles that I teach, which are the community based principles, the rooms, how they're how they're held, and the and then some of the longer term commitments. Like for example, one of my property managers that works with me, you know, he uses pads to fill his homes, but he has an average length of stay of a year and a half, which is like so much greater than almost anybody that else that uses pads because he uses some of these principles.

2:23— Got it. Okay. So, are you are you signing year-long leases on these on these rooms then that you're you're renting out? — Yeah, we are on on with my property management company where we're where I own a property management company here in Charlotte and Asheville. We sign — we sign 12-month agreements. Yeah. Now, they can do six or they can do six or three just like a traditional apartment building, but it's going to be at a premium to the 12-month agreement. — Got it. Okay. And and and who is your typical guest? Because I imagine it's probably not like a a parents with three kids renting a room.

2:55— Yeah. No, it's not. Yeah. So, we call them members. So, our members would be, you know, on average in between 25 and, you know, there's kind of two groups I would put these in. You know, okay, people between 25 and 40 years old, they're single, maybe they got divorced, maybe got never married, maybe they got a girlfriend that lives somewhere else — and they are getting started in their career or maybe their career didn't take off as fast as they want and they're looking for options. And so that's going to be someone in the lower age group, but then we've seen a huge like 55, 60 plus.

3:27— There's this sweet spot kind of middle age where people are maybe most, you know, mostly married or they're their busiest their their their highest career. Earning years that we don't capture a lot of, but usually on the younger end and on the older end, people that are on fixed incomes or or going through a the people in the middle we get usually when they're going through a transition in life. — They got a divorce that they didn't think was going to happen. They lost all their money in something and they're like, "Okay, I'm rebuilding and I'm I'm willing to make some sacrifices to rebuild." — But the people that are more permanent or longer term are going to be the people on the the the people that I just described.

3:59And then the 55 60 plus that are on social security, not really working age anymore. Maybe they've had some health issues or something like that and so they're going to be willing to commit to something as and make the sacrifices that it takes to live in a co- livingiving home but obviously everything's all utilities are included and it's just a lot cheaper rent. — Yeah. Well, and you're also kind of I I feel like in that I hadn't thought about that age group. I I was thinking it would be geared more toward the younger, but for that age group, you almost get all the benefits of an elderly care facility a little bit, you know, where it's kind of rent by the room, similar model.

4:34Less wear and tear, I would imagine, longer commitment, you know, they're not wanting to bounce around and get new jobs all the time. And so, I would imagine less turnover. So, I I I would think that would be a really great sector to to cater to. — they're stable, too. And sometimes they're on fixed incomes. Yeah. — Yeah. Exactly. So, how long is does your do they typically renew then? I mean, what's your average lease length? — Over a year. So, I mean, if you average it out, it's over a year right now.

5:06But we we kind of — we kind of measure lease or length of stay just based on like per property management company. So, my my particular one is like maybe 11 to 12 months somewhere in there. Okay. The one I was just describing to you is is one that's in a bunch of cities run by two guys. Their name are Jay and Franco. And they have even longer. They're at 4 like 35 days. So I think they're at what is that? A year and year and four months, year and five months, something like that. So that's that's pretty typical to what we're seeing unless someone's just doing a really bad job. If you're doing a bad job management or maybe you're Yeah.

5:39You're not following some of these different principles that we can talk about, then you're gonna you're just gonna have people move out. — Sure. Yeah. — Or if you're not handling conflict in the home, well, that's a big thing. Like, okay, you you have five, six, you're not hand if you don't have some systems for like labeling things or what happens when John does get mad or Susie in room five starts smoking when she shouldn't be like in the room or what, you know, these different little things that come up that wouldn't come up in traditional property management. — How you handle those is going to determine how long people stay. — Yeah.

6:10Yeah. I wanted to ask you about that because Yeah. I think that's probably the horror stories that people think of when they think about this model compared to just renting a whole place. They think, well, I'm going to have to babysit people and there's going to be all these problems. So, how do you prevent that from happening? What what what are the proactive measures you can take? — Well, if someone's listen I just want to say this for everybody listening. If someone's listening and wants to do co-l livingiving and doesn't want to deal with that, just that's a that's a I want to just validate that that's a fair request.

6:41If someone's listening to this and you've got a W2 and you're like, "Man, co- living sounds awesome. I love the cash flow and I love the mission behind it because there is a big mission behind it too of solving affordable housing and frankly just helping people that are in situations where they need this type of housing." Then you can get someone else to manage it. — Like there are man, right? Like I just don't want everybody to default to I have to handle these conflict situations. I mean, I manage a bunch of my students properties. There are property management companies that are popping up in in almost every major city. Now, sometimes a little hard to find because they're not advertising or they're new or whatever, but I just want to clarify this is a manageable asset.

7:14This is like a little mini apartment building in a single family home. And there are people who will do that for a fee. So, you don't have to handle this if you don't want to. Because I still want to make this asset class accessible for anybody who wants to to to be involved. I I'm you know my wife and I own several hundred doors of caming doors and we don't manage I I haven't handled a tenant conflict in last bunch of years. So — — but but as far as how we do handle it okay when the when the when it comes up I mean it really it really I laugh because there's just so many things that can come up.

7:44— Yeah. — Right. I mean it could be and all this does not come up. Let me see if I even have this could be actually kind of funny. I'm going to scroll through because we have an SOP for all these things. So, I'm going to scroll through and I hope I'm not I'm not saying this to scare anybody. I'm scaring this because I want this podcast to be real. — So, we have these scripts of like here's all the things that could come up and here's like the system that we handle all this, but I'm going to I'm going to Okay, so — so we've got a whole flow for when someone's smoking in the home and they shouldn't be smoking in the home, right? And that's going to obviously bother a bunch of people, warnings and fines and things like that. We have a whole flow when someone is having too many guests over because we we we cap their guests at five per month and they're not over their their their that's the limit of overnight guests.

8:27So, there's a whole flow for that. There's a whole flow if someone's not locking the front door. There's a whole flow if someone's too dirty. There's a whole flow if someone's too loud. There's a whole flow if someone is stealing food, believe it or not. There's a whole flow if someone's bringing doing something where it's creating pests like doing bugs or being dirty. Again, that goes back to dirty or bringing in pets. Is a whole flow for that. Obviously, there's the whole eviction flow and I'm just sharing the let's see, there's a couple other ones here. Wi-Fi issues, different things that we have to handle. Yeah. So, you get the kind of general idea. I could go on, but the general idea is yeah, there's there's different things in this that are not in normal property management that we have to have a system for.

9:02And normally though, to give people kind of a big picture outline of how we handled it, it's it's all in a membership agreement that everybody signs. And a membership agreement is different than a lease because it allows us to terminate people for like breaking house rules and it gives us more flexibility. I I don't recommend leases in this model. It also gives us a little bit more flexibility around restrictions about how many unrelated people can live in a home. So that's why we use this thing called a membership agreement. We have a bunch of house rules.

9:33They initial they sign. If someone breaks it, it's usually like a warning, a fine, and then a termination. I mean, that's in essence the system. It's much more complex and detailed than that, but a warning, a fine, and then a termination if it continues to happen. Obviously, if it's something like violence or something crazy like that, we're just going to terminate immediately. — Yeah. Do you have to go through an eviction process if you terminate? — So, if you use membership agreements, and I want to be clear about this because I've done both, but I'm not a lawyer and I'm not here on your show giving legal advice, but I'll share with you what we do. If you truly use a wellp put together good membership agreement, something that we spent tens of thousands of dollars creating, you do not have to go through an eviction process.

10:12You can you can remove them from the home because they are it's a protected membership agreements membership clubs like fraternity clubs and some of these religious or they're they're they're protected under certain rules. They don't fall under the normal landlord tenant laws a lot of times. And so with the membership agreement, we kind of we kind of get around that a little bit. Not in a sneaky way, but in a way of like we're a little bit different. People are signing up for us like they are for they're paying dues and they get all these other benefits in addition to living in the home, right? They get their utilities taken care of. They get access to to yearly events that we do.

10:44It's it's a membership, — right? — And we need to be able to termit that right away though. And so we have for we have removed people from home. We've hired private security. Now I'm just going to be real honest on the show. I don't think that's the way to go at scale because you're Yeah. You're going to get into some situations. Obviously, if you have to hire private security, you're going to get into some situations going to be intense. So, you also can go through the normal eviction process if you want to, but it does give you more flexibility on how you deal with those situations. — Interesting. Yeah. Yeah. And it's funny as you read through those those scenarios, we we created a document for our short-term rentals.

11:18It's similar in in terms of like this is what we recommend saying to guests in different situations or how to handle different situations like there was damage to the property or they want a book and they have no previous reviews or — you know all these different things where it's like they're nuanced — you know and and you don't want to go in there and say the wrong thing or you know we we and we learned all these from doing it the wrong way initially. But it's so helpful to have that document that you can just refer back to because no problem's unique. Like they they the same issues will come up.

11:51Luckily it's not all the time, but you want to know how to handle it. So, — yeah, that's a great point. How how much do you — one big document? — Oh, yeah. — One big SOP document for that type of stuff. It's good. — Yeah. — How much do you charge per per room typically on your And then I guess I'm sure it's different everywhere, but where where's the sweet spot for this model working? The sweet spot in terms of price per room. — well, no, I I meant like location market and that sort of thing.

12:22— So, so in Charlotte, we're going to charge anywhere between 650 for a really small bedroom with a shared bath that might not be super updated to on the high-end 1,300 for a private bath m, you know, big room maybe with a little private entrance or something like that. So that's kind of I know that seems like a wide variety, but it really is a wide variety. And so that's kind of how we that that's and and an average studio apartment in Charlotte, just to give people a reference point, is probably around $1,300 to $1,500 somewhere in there.

12:55So we found that large but but our prices are our prices are utilities all included. So pest controls included, you're you know, cleaning the home once or twice a month is included. They're getting a lot for that for that price. I think there's a sweet spot on price, which I know not a, you know, sweet spot on price is going to be anywhere between 70 and 80% of what a studio apartment will go for in that city. — It's probably what you're going to be able to charge for a for a room. — Other ways to find out what you can charge for a room is just to go see what other people are listing their room for.

13:26Go to Craigslist, click on room shares, go to Facebook Marketplace, look for a room for rent, and just see, okay, wow, that's a really nasty room. It's going for 600. Yeah, that's a nice one. It's going for 800. That's a way to comp it, to see what you could to run your numbers in a city. As far as where this as far as where this can be done, you know, we've seen success in in almost every major city in the United States. I mean, I I have we have enough students now that we're in probably 40 to 50 of the major cities around the you know, I say major, there's not that many major cities, but major slash, you know, tier 2 cities, tier three cities, but the the markets that I like right now is like these markets where housing is high enough.

14:12There's a sweet spot between the cost of a studio apartment is is out of reach for a lot of people. And the reason I keep using studio apartment is because that is normally the cheapest thing in any market for someone to rent. — Yeah. — Just baseline, right? Like obviously there's rooms, but like we're the ones inventing rooms and putting them on market at scale. — I say we meaning like co-l livingiving investors, right? So normally studio apartments. So it a studio apartment needs to be out of reach for a for a significant portion of what people are making in that city.

14:46And I wish I had more specific numbers to give you, but there's there needs to be a discrepancy there. Meaning like, okay, if I go to a certain city, Charlotte, Charlotte is a great example. You've got hundreds of thousands of people that are making in between 15 and $25 an hour. And so they're not they're going to be out of reach after taxes or very close to being out of reach of a typical studio apartment plus utilities plus plus plus. And so you're trying to serve that gap. But you know, I had a student recently came to me and said, "I want to go to this I even forget the name of the town, some little no-name town in Nebraska." And I was like, "You can rent a two-bedroom apartment for $450 a month." — Yeah.

15:24— Right. Don't go. Like there's not that discrepancy, right? So is housing unaffordable? Is housing out of reach for a lot of people? You can call, another great way to find this out is just to call the zoning office of any city. They'll tell you, "Yeah, we're dealing with this. We're dealing here's the description." They can give you some numbers for every city. I just don't have off the top of my head, but you know, so we I like Charlotte for that reason. Another really good city for us that we recently launched in is Denver. It's kind of becoming more and more unaffordable. We launched we're launching this next month in Jacksonville. That's still a cheaper city to be honest, but it but it still has a good co-living base because there's a lot of lower income folks there.

16:03St. Pete, Tampa has also been really good for us. — a lot of Dallas, a lot of Texas Marxists have been good. Houston, Dallas, San Antonio. — So those are some specific examples, but I think yeah, hopefully that kind of framed up how people should be thinking about it. — Yeah. Yeah. No, that makes a lot of sense. And it I think people tend to think that property prices and rent prices kind of move in tandem. And what I've noticed with short-term rentals is it's that that's not always the case.

16:34You know, like you can find a place where, you know, rent prices are pretty high because there's just not that much available, but yet property values aren't aren't that bad or vice versa, you know. And so it seems like if you can find the place where where studios are are, you know, the highest price compared to the lowest average purchase price of a large property, that seems like the equation where it could work the best. Is how do you so you mentioned 11 unit or I'm sorry 11bedroom property.

17:10Yeah. — Like did you have to build that? — 11 units. — Okay. 11 unit property. So, did you have to build I imagine there's not a whole lot of homes built with 11 bedrooms in it. So h how did that come about? — Yeah, I'll give I'll give your listeners a formula that we use that's pretty spot-on in almost every market we've been to. So, we always say that if you bring us a 1,500 square foot home that without looking at the floor plan, without ever stepping foot or seeing a single picture of that home, I know I can get four bedrooms out of that.

17:43M — that's just kind of like our little 1500 equals four bedrooms. And then kind of what we found as a general rule is that every 250 ft you add on to that 1500 mark allows for another room somewhere in that house. — Now granted, there might need to be some walls added and some closets and whatever. I'm not saying there's like that many rooms already. I'm just saying that square footage allows this many rooms. And so my formula has always been and oh while also keeping at least one area for common space — for little co-working, eating things like that. That's kind of our So then so let's just walk through the math.

18:16So 1,500 square ft is four rooms. 1,750 ft² would be five. — 2006, 2250 would be 7. 2500 would be eight. 2750 would be 9. Three a 3,000t home I just can get 10 rooms out of. Okay. Space is there as long as the only caveat to this as long as it's not this insane open concept 30 foot ceilings they you know got a catwalk and all this like those are just hard to kind of cut up into the number of rooms that we need to — and so the house we're talking about the 11bedroom house actually we have two 11bedroom houses and one will be at about 3200 ft and the other one is like 3150 or something like that don't quote me on that exact number but right around there so it's just based on our formula.

19:04When you get to 3,250, there is enough space in that house for 11 rooms. — Wow. — so it's really the most important thing when someone is buying a co- livingiving home to look for is does it have the space. I care about square footage more than I do really anything. That's the number one thing I look for. Well, that's not true. I don't care about square footage more than anything. But square footage is is the number one criteria we're going to look at to see how many rooms it could have. Okay, got it. — But we are building what you got.

19:35Don't get me on building, Kirby. We're gonna We're going to rock it into a building. I just got county approvals for a 17bedroom, 15 fullb duplex that I'm building here in Charlotte, North Carolina. And I'm so excited to get the county approvals on that. We're still waiting for approvals from the city for full transparency, but I hope hopefully we'll have that tomorrow. And that the reason I'm building is because I can design it exactly like I want it from the beginning.