Corporate Housing
The Profit Potential Is Worth Exploring
By Angela Healy
Flipping a home — or the process of renovating a home and reselling for a profit is nothing new for real estate investors. When considering home flipping, the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method is often followed.
Beyond this strategy, the most successful real estate investors know that profitable property investments are intentional and have a vision for the future. This is especially true if reselling the home is part of that strategy — requiring foresight into the market appraisal opportunities, renovation costs, and buyer demand.
Over the last three decades, I’ve worked on my own investments and those of my clients to identify, renovate and lease properties for corporate housing. While home flipping requires a baseline level of experience, home flipping for corporate housing has many requirements that must be considered from the start. In this market, my clients — with some upfront capital investments — can turn an unfurnished rental property into a furnished corporate housing rental and triple (if not quadruple!) their monthly revenue.
In today’s tight housing market, the desire to move to new locations is at an all-time high. Those seeking to buy a home in a new area need interim housing and many want to “try-out” their new city before making a major investment in a new home. It is a great time to explore opportunities in corporate housing. If the purchaser is prepared to make the right investments to attract this highly attractive target market the financial returns could be significant.
Here are four factors to consider.
1. Up Your Investment to a Class A Property
Properties are often classified as Class A, B or C to help potential investors identify an ideal property. There is no industry-wide standard for evaluating a house, but factors such as age, condition, location and appreciation opportunities factor into the classification. The traditional, unfurnished rental market is mainly consumed with Class B properties owned by real estate investors for a passive income source. These properties are almost always in demand from low to median income tenants, and less expensive to purchase when compared to Class A properties.
When purchasing a property to rent, the investor will usually invest just enough to make it a Class B property that can be rented to generate approximately 1% of the value of the property to cover the mortgage each month. To do this, appliances are updated, finishings such as countertops and lighting are replaced, paint is refreshed and new carpeting is installed before each new tenant. However, unlike a Class A property, expensive finishings and design features are not incorporated into the renovation. With a Class B approach, asset preservation is not prioritized as renovation must happen every 1-2 years in-between tenant occupancy.
However, those investing in the corporate housing industry can benefit from owning a Class A property to be rented. With a Class A property, asset preservation is prioritized and investments are made to extend its durability and appearance. By bringing it to a higher value — and renovating it as if you would sell it as a Class A property — owners can demand a higher rental value. Unlike unfurnished housing, a corporate housing property typically does not have to be refreshed every year and the asset is preserved.
Consider the above chart. While the upfront costs to purchase and renovate a Class A property is higher in year one, the market opportunity in corporate housing should generate greater long-term returns.
2. Not Every Property is Well Suited for Corporate Housing
When considering purchasing a property for corporate housing, the investor must consider a variety of factors that extend beyond a typical evaluation. What may look like a great property to the traditional investors, may lack characteristics that enable that property to be leased for corporate housing. It is important to solicit the services of a realtor who is experienced in corporate housing with an understanding of the distinguishing characteristics and can help the investor evaluate potential properties.
In my experience, we consider location, safety-ratings, the unit quality, design aspects and layout as well as the HOA and rental regulations that apply to the property. Often, small details such as unit accessibility, can make it difficult to rent to corporate housing guests. It is important to start with a solid foundation so that the renovation and maintenance costs are contained where possible so it can be a flip versus a flop.
3. Quality Over Quantity
In traditional real estate investing, particularly with unfurnished apartment leases, the quantity of properties — versus quality — can increase the revenue potential of the investor.
However, with corporate housing given the more frequent turnover (every 3-6 months on average) and the higher level of service required to maintain the quality over time, a large volume of properties could become increasingly difficult to manage. Therefore, it can often be more advantageous for a property investor that manages his or her own properties to consider purchasing a 3 or 4 bedroom corporate housing property which would generate the equivalent of 4-8 single bedroom properties, with a fraction of the management and maintenance needs.
The combination of remote work and a tight housing industry has put a demand on fully-furnished single-family homes and townhomes suited for families. These are often used for families that are relocating or traveling as a family, and resulting in an increased demand that is not expected to fall. Therefore, property investors should consider the quality and revenue potential of one or a few properties versus numerous, lower-quality properties. In some cases, a happy family and corporate housing tenant may decide the property is such a perfect fit that they want to make an offer to purchase it.
Long-term mind-set
A corporate housing investment strategy requires a long-term mind-set. It is likely that after renovating and furnishing a corporate housing property, the first year of rental income would result in neutral or minimal revenue for the property investor. However, as the property appreciates and earns a higher monthly income, the total revenue will grow and the value of the property will continue to rise. In addition, the home furnishings and interior quality will depreciate slower than a traditional unfurnished property where furniture movement and long-term wear shows. A corporate housing guest will almost always show a higher level of respect and care for a property — especially when a company is footing the bill.
Typically, a property investor will aim to sell a property after 5-7 years using a 1031 exchange for tax purposes, allowing them to turn that initial investment into two new properties. Corporate housing investment is a long-term investment, and those with the patience will reap the reward in the years to follow.
Case Study
My colleagues at AvenueWest Raleigh recently helped a property investor transition an unfurnished four-bedroom property that was leasing for $1,400 into a corporate housing property that now earns $5,200. They assisted the investor in seeing the potential of this home that was in a premium location, but lacked the quality furnishings and interior to earn rental income at a Class A level. In addition, they identified the renovations that were needed, coordinated the contracting process, and purchased the furniture to align with the design vision. Now, this property that was purchased for $160,000 is appraising for over $400,000 and generating significant monthly income for the investor.
Flipping a home for corporate housing is not an easy process, but with the right guidance, expertise and patience — the profit opportunity is worth exploring.
