627: How to Get More Rental Income for Your Buck

SHOW NOTES FOR EPISODE 627: HOW TO GET MORE RENTAL INCOME FOR YOUR BUCK

During inflationary times, increasing your rental income is critical.  But what if you could double, triple or even 5X your rents?  In this episode, real estate investor, CEO and co-founder of HomeRoom Co-Living shares how he was able to convert a 3-bedroom 2-bath house to accommodate multiple roommates and leverage that into a multimillion dollar real estate enterprise!

What You Will Learn

• The definition of Co-Living and why it is one of the hottest real estate investments today
• How does Co-Living differ from Airbnb?
• What the ideal home is to convert for co-living
• How to keep roommates from getting on each others’ nerves
• Why tapping into public data can significantly increase ROI
• Where the best Co-Living markets are
• Why the demand for co-living is growing

About Our Guest

Johnny Wolff

Johnny Wolff is the CEO and Founder of HomeRoom Co-living – one of the fastest-growing co-living companies in the United States. After starting his career as a financial analyst in Silicon Valley (EA, SanDisk, Guidespark), he relocated to Austin, Texas to pursue real estate investing fulltime. His love for real estate investing and living with roommates motivated him to start HomeRoom in 2017, after an unusually terrible Craigslist roommate experience.

In 2020, HomeRoom boasted 99% on-time rent payments, full occupancy, and zero evictions. Sales velocity for HomeRoom is up 300% in 2021 with hundreds of happy residents across 23 cities in 3 states. Powered by investor funds, HomeRoom recently expanded to Dallas and Austin, Texas. Johnny still lives in one of HomeRoom’s first co-living houses in Kansas City, and enjoys hanging out and surviving the pandemic with his awesome roommates – especially on chicken wing Thursdays.

More About Johnny

• Johnnie lived in the San Francisco Bay area
• He worked for tech start-ups, doing finance, analysis, data science and operations
• Behind the scenes, he was investing in real estate
• His first real estate investment was in 2008 in the oil area of Texas for about 7 years
• In 2015, he moved to Austin
• He had 4 other friends that he wanted to rent a home with but no landlord would take 5 guys
• So, he bought a 3-bedroom, 2 bath house, added some walls to create a 5-bedroom house
• They had a maid and yard care
• It was a great social experience
• Behind the scenes, he was making really high returns on the rental income because he was renting out each room separately
• So, 2015-2018, he ended up buying a number of other properties in Austin that he also rented by-the-room
  • His returns were over 500%
• He was working full-time during all of this
• He shared the returns with friends he knew in the Bay Area and they asked, “How can we invest?”
• He emptied his retirement account, moved to Kansas City and started HomeRoom in 2018

Creating HomeRoom With Investors

• In Austin, he was managing all of these properties while working full-time
• Starting, the business was a way for him to get out of the property management side to concentrate on scaling the business
  • Today, all his properties are managed by the portal he developed called HomeRoom
  • Today, he has managers that do what he used to do
• Investors will typically buy the home based on HomeRoom recommendations
• HomeRoom also find homes, on occasion, that they make available to investors
  • HomeRoom uses data science layers to identify homes with the highest potential yield and appreciation
  • In addition to that, they will get specs to the inspector on what needs to be done to the property
    • It may mean building walls like he did on his first property
    • Furnishing the common areas
      • The common areas in the kitchen have essential items, like an Airbnb would have
    • The bedrooms are all unfurnished
  • Always Single Family Homes
    • Sizes may very from a 2-bed 2-bath townhome to 7-bed 4-bath
    • Typical would be a 4 or 5 bedroom house with 2 or 3 baths (the more baths the better)
      • It must have ample parking
    • Homes can range from, for example, in Austin, $500,000 to $750,000.  In Kansas City, average home price is $300,00
  • Rents can range
    • In Austin a typical room can run from $500 to $800.  In Kansas City, rents are in the low $400 range
  • It’s set-up an ideal way so that investors make the most money
  • However, everyone benefits from the system that HomeRoom has established
  • For investors, they are looking for an IRR around 20%
  • Cash yield varies.  Austin is the lowest and Indianapolis (yielding 10% plus) is the highest
• Lease terms are also flexible
  • You can get a lease from 3 to 24 months
  • Rents are paid on the first of each month
• Identifying High Yield Properties
  • Their Data Science Team works to predict property appreciation above market average
    • They use a lot of different data sources to do that
      • Crime stats and trajectory
      • Immigration in an out of a neighborhood
      • SnapChat Info – How many SnapChats are taken
      • Instagram activity
      • Other Social Media data sets
      • They integrate all those pieces together
    • For rent forecasting
      • They have created an in-house tool that
        • scrapes Craig’s List, Roomster and a few other data sets
    • Johnny’s partner is a former data scientist from Airbnb
• Identifying Markets
  • Johnny feels that all markets are good markets for co-living – there’s need in every city
  • In terms of what’s ideal for an investor, that’s really relative to their risk profile and what they’re looking for
    • If they want to maximize their yield, they can go to somewhere like the Midwest but they won’t get a great appreciation
    • If they’re looking to increase their net worth, markets like Phoenix, Tampa or Austin are great options
  • Good population growth is a key factor for a great market
• HomeRoom charges a 15% platform fee (based on rents), similar to Airbnb

The HomeRoom Portal

• 90% of the tenants book rooms without actually seeing them in person
• They can see professional pictures
• Take virtual tours
• See the roommates who live in a house that interests them
• They can apply for a room within 15 seconds
  • Use standard credit and eviction tests but it is very fast
• A tenant can sign a lease and pay within 5 minutes

Creating a Good Living Environment

• Sone of the key issues roommates have are:
  • Dividing utility bills and getting paid back
  • Dishes in the sink
  • HomeRoom helps alleviate roommate stress in these areas
    • One of the ways they prevent stress with roommates is by hiring a maid that comes every month
• To deal with utilities
  • They have an amenity and services fee
  • Amenities include utilities
  • Tenants pay a fixed amount each month that covers utilities, Internet, maid service and yard care
• Repairs and Maintenance
  • All repairs and maintenance issues are handled by HomeRoom
    • It’s no worry to tenants or owners
• Evictions
  • Also, completely handled by HomeRoom

What Investors Want

• Some want appreciation
  • So the best markets are Phoenix, Austin
    • Popular among technology workers
• Some want more passive yield
  • They will go for cash flow markets like Kansas City, Indianapolis, Pittsburgh

Market Demographics

• HomeRoom’s minimum age is 21 so they don’t get many students
• Their average age is 28
• Post college, pre-marriage
• There are those in their 30s that are tired of living alone in a studio who are really attracted to co-living
• All markets are different
  • Austin
    • Income that is higher
    • Massive immigration happens in and out of city
  • Kansas City
    • Lower incomes
    • They are typically born and raised in the city

Biggest Mistakes

• He’s learned a number of things
  • Who you hire means more than anything else
  • How important it is to properly align incentives
    • The people who are in charge of sales are also in charge of the customer experience
      • This helps keep them from selling something they can’t deliver on

Biggest Success

• Early on, they had no money
• They didn’t have tons of money like many start-ups
• All they had was Johnny’s retirement savings of $200,000
• Because they didn’t have much money, they used grit and efficient options for the reason of survival
• It helped build the right ethos for their company
• If they would have had tons of money, they may have blown it like many start-ups do

Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years

• Real estate is one of the best investments out there for both equity and cash flow
• It always has value, generally doesn’t go down and is very consistent
• If you looking for bigger returns, co-living is excellent with rents 50% higher than traditional rentals
• Johnny says, “If you’re looking for cash yield, you’re not going to do much better than co-living.”

Current Business

• His goal is to be in 1,000 different cities in the next 3 years
  • Today they are in 8 metro markets – Phoenix, Kansas, Dallas, Austin, San Antonio, Indianapolis, Pittsburgh, and Tampa
  • They can expand rapidly with their own proprietary software
• He sees the massive surge of population growth, creating a demand for his service
  • In 1980, 11% of adults 18 to 35 lived with roommates
  • Today, it’s 27% and 45% in that age are living with parents
• It’s very clear that student debt, aging parents and loneliness has created a need for this type of living that is not being addressed by apartments
• They are very excited about these trends
• He sees that millions and millions of people can benefit from HomeRoom

Rap-It-Up

• Favorite business book: The Hard Thing About Hard Things by Ben Horowitz
• Favorite app: Slack
• Favorite quote: “It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena…” – Theodore Roosevelt
• If you lost everything – all your assets – and had to start all over, knowing what you already know, and you only had $1,000, what would you do to re-launch your real estate investing business? I would do exactly as I did in Austin.  Their are down payment assistance programs available nationwide.  So if you want t o buy a primary residence, sometimes you can do it for no money down with the help of a down payment assistance program. I would buy a new home, probably in Austin again or a rapidly appreciating city like Tampa or Boise, with the right amount of bedrooms. You could turn $1,000 into $200,000 in a few years.

How to Reach Johnny

• Personal Email: johnny@livehomeroom.com
• For interested investors: LiveHomeRoom.com/invest

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Additional Episode Sponsor: Meno Studio – menostudio777@gmail.com