609: Investing Opportunities in Co-Living

SHOW NOTES FOR EPISODE 609: INVESTING OPPORTUNITIES IN CO-LIVING

A phenomenon is rapidly spreading across the U.S. in response to escalating home prices and skyrocketing rents!  In today’s podcast, Frank Furman, COO of PadSplit, the country’s largest co-living marketplace, shares how Airbnb-type boarding houses are filling the need for affordable workforce housing in America.

What You Will Learn

• How to turn a side hustle into a multimillion dollar business
• What is co-living and why is it changing the face of rental real estate?
• Why a resident/tenant-centered approach works best for short-term rentals
• How “co-living” is bringing back the age-old, tried and true boarding house as a solution to the affordable housing crisis
• Why weekly rent works better than monthly rent and long-term leases
• Who is the ideal candidate for low-income co-living?
• How technology makes co-living accessible to a huge audience
• How you can make double the rental income with co-living

About Our Guest

Frank Furman

Frank Furman is the COO at PadSplit, the country’s largest co-living marketplace for the workforce. Prior to PadSplit, he worked as a Category Director at Georgia Pacific and as an Engagement Manager for McKinsey & Company in London and Atlanta. A former infantry officer in the United States Marine Corps, he commanded at the platoon and company levels and served two tours in Afghanistan. He has a B.S in Aeronautical Engineering from the United States Naval Academy and an M.S. in Applied Physics from Johns Hopkins University. He and his wife Caelyn live in Atlanta, and have three children, Rudyard, Byron, and Winniefred.

More About Frank

• Grew up outside of Philadelphia
• Went into the military (15 years ago)
• He stumbled into military
• He was stationed out in 29 Palms in California for the Marine Corps
• A brand new Lieutenant in the Marine Corp in 2008 and after basic training and grad school
• The real estate market is in a tailspin
• He has a government salary
• He was in a very inexpensive real estate market (in the middle of the Mojave desert)
• He thought, “I’m going to be here for 4 years.  I can buy a house and rent out rooms to my buddies.”
• Could have purchased a house for $110,000
• Kept looking at cheaper and cheaper houses
• They all looked like dogs and had issues (squatters, hole in a roof, etc.)
• But he got cold feet…
  • Said, “I’m not ready to take this on right now.”
  • Too much work
  • I’ll be too busy
  • Will be focused on deploying
  • He bailed on the idea even though the numbers made sense
  • He regretted it later on
• But he never lost the itch for real estate investing
• His brother-in-law (Atticus), who lived in Atlanta, had been interested and involved in real estate investing for a while (majored in architecture in college)
  • A few years later, Atticus started his own business
    • He was raising money
    • Frank invested with him on some projects (flips, apartments, etc.)
  • In 2008-2009, Atticus was also buying up single family rentals on the side for his own portfolio
    • Over time, Atticus saw how profitable they were and how they served a major need in the marketplace
    • He was also doing construction and hard money lending
    • He was more of “the deal guy” and always was looking for new things
    • Atticus had this “room rental” model in mind
  • In 2017, Frank moved to Atlanta
    • He left his management consulting job with McKinsey and took a job at Georgia Pacific
      • Loved the job but wasn’t at his capacity and he wanted to do more
      • He started looking for a side hustle
      • He began talking with Atticus and started working part-time with him

Growing a Real Estate Company

• As he was working the side hustle with Atticus, they were both looking at what they wanted to do with the business
  • Door #1 – Start a traditional real estate company
    • Buy, renovate and manage homes to rent out by the room
  • Door #2
    • Build a platform where you can offer room rentals everywhere – becoming the “Airbnb of Co-living”
      • But…
        • They didn’t have the money
        • And didn’t have the technology
  • Instead, they started a property management company to…
    • Learn the operations
    • Build the ecosystem
    • Work with landlords
    • See how the first homes took off
• Sharing housing (boarding houses) is not uncommon
  • It’s a part of early U.S. history
  • Students still do it all the time
  • Frank did it in the Marine Corp

His Light Bulb Moment

• Frank had a revelation – this isn’t just for young people (Gen Zs or Xs)
• This is how things used to work back during your grandmother’s days and before that!
  • If you were single, and just getting started, for example, as a woman in New York City with a job working in an office…
    • You didn’t rent an apartment just starting out
    • That was impossible on starting wages
    • You lived in a boarding house
  • If you were a single guy, working in factory, before you got married…
    • You moved into a boarding house
• This is an old established way of living that has been around forever
• But regulatory, cultural and other influences made “boarding houses” less predominant
• However, it’s still the most effective way for people to get their start and afford housing
• And the demand is strong!

Finding the Niche

• Renting apartments or houses is difficult for single people just starting out who have:
  • lower wage jobs
  • no college degree
  • no family nearby
  • people who are new to the area
  • lower social network
• It was easy for Frank (in graduate school) to find housing because…
  • He had a college degree
  • Was an officer in the Marine Corp
  • Had a good salary
  • Presented well
• But, the same could not necessarily be said for others who are…
  • A security guard
  • Without a college degree
  • Have low income
• This is the kind of person who needs the service their company wanted to provide
• They took the tools that are available today and made it available for anyone

Co-Living Management

• In their model, they layer in:
  • Processes
  • Tools
  • Customer support
  • Partnerships
  • To help better manage individual properties
• They get very involved (even pre-acquisition)
  • If someone says they want to do their model…
    • They are looking for “the right asset”
  • They get involved by:
    • Training property managers
    • Training hosts
    • Getting all the right things in place first
  • Technology
    • Built a ton of scale capability around:
      • Screening
      • Communications
      • Maintenance tickets (for example)
        • With traditional rentals, the tenant reports a leaky sink
          • it goes to the property manager
          • the property manager sends a plumber to fix the leaky sink
          • When the plumber shows up, the person who answers the doors knows what’s going on
        • But with a co-living home, the person who answers the phone or the door may not know about the problem
          • So, with a co-living situation, when the work ticket is issued, everyone in the home gets the ticket – they all know about the problem and who requested the work order
  • Turnkey Co-Living Properties for Investors
    • For people who understand it and are passionate about the model
    • But don’t have the time, capability or bandwidth to do it on their own
    • To make it easier for Investors, they have
      • Built an eco-system and vendor network of folks who can do the property management side of things
      • They sell fully turn-key properties that his company/find that has been:
        • Purchased
        • Renovated
        • Is managed top-to-bottom
        • For out-of-state investors who want to invest in the sunbelt and co-living (Texas, Georgia, and Florida areas)
        • It’s all about understanding their customers’ journey and their customers’ needs
        • They want to make it available everywhere
    • Investors will own the house
    • Their target returns that are roughly an 8% unlevered return on costs
      • Once you put in long-term debt, it’s higher than that
      • And that’s independent of HPA (house price appreciation)
      • They are a cash flow business and take a percentage of revenue
    • They are confident that they will be double the yield of traditional rentals

Co-Living Property Ideal Criteria

• They look for bigger properties
• Close to public transit
• Off-street parking, or on the property
• School districts are not important
• Being close to an airport is less important
• Near commercial districts is a plus
• Size between 1,400-2,500 sq ft
• They like split-level homes
• They like daylight basements
• They look for value-add properties where they can add space without a huge footprint
• Generally 4 bedrooms
• Price point: Between $200,000-300,000

Property Management

• They call their property manager the “Host” (borrowing from Airbnb)
• The Host is the person who operates the property
  • The Host is generally a professional property manager who works for the property owner
  • In other cases, the Host is the property owner
• They have a comprehensive rating system to keep the marketplace accountable
• The residents are rating:
  • The rooms
  • The Hosts
  • Maintenance tickets
• They carefully track the “closed ratings” as well as the public ratings
• They try to follow-up to make sure resident experiences are good and will talk to operators that are having problems or even remove them from their platform if things don’t improve
• They don’t have ratings like Airbnb – it’s only “in-house” at this point
• People stay longer in Frank’s model, compared to an Airbnb
  • The average stay is 9 1/2 months
  • Also, they don’t collect the money upfront like Airbnb – tenants pay weekly
  • They have to sign-up for a minimum of 31 days and, after that, can stay as long as they want, as they are billed weekly
    • He does that partly to avoid short-term housing regulations
  • The biggest challenge in low-income housing is that tenants can’t pay
    • That’s why they have weekly rental payments
    • It gives the tenants more flexibility
  • Frank wants the commitment to be short-term so the tenants never feel trapped in a lease
  • It’s all electronic rent payments too – autopay, ACH
• They currently manage over 4,000 rooms
  • Frank and his brother own a small percentages of their own properties in Tampa, Indianapolis and Atlanta

Room Booking Process

• Generally, a prospective resident will go to the PadSplit website…
  • Sign-up for an account
  • They go through a general application process:
    • Background
    • Credit
    • Income verification
  • Then, they are approved as a PadSplit “member”
• Next, the prospective resident can see and book rooms
• Once the room is booked, then they can move in
• On the property management side, investors/owners/hosts create their host account and post their property
  • Frank’s in-house team then verifies the listing and checks various safety components (egress, smoke detectors, etc.)
  • If everything checks out, then they activate the property
  • Then, there are training and other host-focused resources that help create a good property listing

Your Biggest Mistake

• He was stationed out in 29 Palms in California for the Marine Corps
• A brand new Lieutenant in the Marine Corp in 2008 and after basic training and grad school
• The real estate market is in a tailspin
• He has a government salary
• He was in a very inexpensive real estate market (in the middle of the Mojave desert)
• He thought, “I’m going to be here for 4 years.  I can buy a house and rent out rooms to my buddies.”
• Could have purchased a house for $110,000
• Kept looking at cheaper and cheaper houses
• They all looked like dogs and had issues (squatters, hole in a roof, etc.)
• But he got cold feet…
  • Said, “I’m not ready to take this on right now.”
  • Too much work
  • I’ll be too busy
  • Will be focused on deploying
  • He bailed, even though the numbers made sense
• Later on, he regretted getting cold feet

Your Biggest Success

• Understanding early on that their growth was tied to investor outcomes
• Unlike selling widgets or other tangible things, where anyone with a credit card is a prospective customer, their success is dependent upon their partnerships
• For their company to be successful, their partners have to be happy, love the company and the process
  • His best “sales reps” are their residents and hosts
  • If they have a good experience, they brag about it with their friends
  • If they have a bad experience, they’ll tell their friends as well
• For him, the focus has to be on investor outcomes and the resident experience
• For example, a lot of people came to him and asked, “Why to you do you will weekly?  That’s weird!”
  • Why do landlords bill on the first?  Because it’s what we’ve always done – everyone does that.  It makes the lenders happy and it makes the accountants happy. It makes collections easy.
  • But it’s not very customer focused
  • Instead of looking at what’s easy for the landlord, accountants and banks, they asked the question, “What’s easier for the customer?” What does the customer need?
  • He is still serving the needs of customers and he has two customers: the landlords/owners and the residents/tenants
    • Frank asked the question: “How to de think about and address their needs first and then derive how we think about assets and the technology

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

• He feels that the people who would enjoy this real estate investing model the most are people who have a passion for problem solving
• For people who see this as an interesting model that they would like to get involved with, he sees it as two different offerings
  • As a more active investor, being a host can be a real rewarding, fulfilling and challenging experience (running a good business is a real challenge)
    • They have a turnkey offering where you are buying an individual property
  • As a more passive investor, that’s great too!
    • For passive investors, they have a sidecar fund for accredited investors only
      • Investors can invest in a portfolio of PadSplit properties across 5 different markets (Dallas/Fort Worth, Houston, Atlanta, Jacksonville and Tampa)
      • The fund has a 20% IRR
        • An 8% unlevered return on cost
        • A 10% operating cash-on-cash return
        • An 8% preferred return for LPs and 20% promote
        • Quarterly dividends

Current Business

• They are headquartered in Atlanta, which is their number one market
• Frank is excited to see how their model adapts to other markets
• They started as operators thinking they knew how to do everything
  • He feels that, when they first got started, they tried to control too much
  • They are now listening more to hosts and are willing to work with hosts to help with local marketing efforts and to deliver more niche-focused service. (i.e. themed housing, veteran housing, women’s only housing)
  • They are now considering using their platform in ways they never initially intended, even to the point of host-generated marketing
    • Some hosts are asking, “How can you make it easier for me to post my property on social media to drive traffic to my room specifically?”
• Real estate industry is in a very interesting place right now
  • It’s been very resistant to innovation
    • We build house much the same as we have for he past 100 years
    • We buy houses a lot like we have in the past and it’s ripe for disruption
  • The mortgage industry is very efficient

Rap-It-Up

• Favorite real estate book: The Power Broker by Robert A. Caro
• Favorite business book: Junkyard Planet by Adam Minter
• Most valuable web site for success (other than your own): Zillow and Google Maps
• Favorite app: Hoopla
• 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? Probably get into wholesaling, drive around looking for vacant properties, do some skip tracing to find people looking to sell off-market properties. Try to get seller financing.

How to Reach Frank

• Website: PadSplit.com
• Email: Frank@PadSplit.com

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