Sticking with the Mission
PadSplit’s Unique Co-Living Platform Empowers Investors & Residents
By Carole VanSickle Ellis
You can do good and do well simultaneously,” Founder and CEO Atticus LeBlanc (yes, named after that Atticus) asserted when he talks about PadSplit, the Atlanta-based co-living marketplace that has spread far, far beyond its initial metropolitan base in the southeast to 10 markets around the country. “At our core, we have a mission to help solve the affordable housing crisis one room at a time, but investors also need to earn a significant return,” he continued. “If they get paid more for doing good, which is sometimes controversial, it only incentivizes them to create more supply!”
LeBlanc founded PadSplit in 2017 with Frank Furman, who serves as the company’s chief growth officer, and Jon O’Bryan, the company’s chief technology officer. The CEO seldom mentions the affordable housing crisis, the problem the public benefit company hopes to resolve to solve, without also detailing the benefits that contributing to the solution to this problem brings to PadSplit “hosts,” the property owners who own the co-living properties listed on the platform, and the investors who work with the company.
“PadSplit is a marketplace that empowers the millions of individual entrepreneurs all across the country and around the world to take an asset in which they are already investing and make it more profitable while making it more affordable,” LeBlanc said.
The key to this seemingly “magic” combination lies, as the company’s national fund and partnership manager Shani Franklin explained, in aligning the incentives for success across all parties from passive investors to active hosts to the residents who live in the properties.
“I am passionate about homelessness prevention because I was, at one time, homeless myself,” Franklin said. “Solving that part of the equation and helping residents find a respectable, affordable place to live is extremely important. The best way we can do that is to increase profits for our investors.”
The entire PadSplit team is clearly dedicated to maintaining the win-win scenario for hosts and residents, noting that the only way that this type of housing solution can spread is if it pays for investors who rely on their returns to support their own families, communities, and passions. LeBlanc recalled his initial forays into real estate, noting that when he realized he had enough to support his family and sustain college tuitions and retirement, his interest shifted to leaving a legacy for “positive impact in the world.” As an urban planner by training, LeBlanc had already utilized his formal education to improve neighborhoods where he was purchasing rentals, including working with two neighbors facing foreclosure who ultimately rented rooms from him.
“That was my first ‘ah-ha’ moment,” LeBlanc recalled. “Those two men were working hard, living in a house that had a tarp on the roof for a year and no air conditioning in Atlanta, Georgia, and they had no other choices.” He worked with the men to establish a room-rental arrangement in the house he owned next door to their property, figuring out what would be needed in terms of furniture, payment processes, utilities, and weekly payments.
“It was easy to see that we were reaching much greater levels of affordability and, in terms of returns, it was significantly more profitable at the same time,” LeBlanc said.
“In order to scale and support our mission, we must be hyper-focused on investor returns,” emphasized Furman. “Investors, both in the fund and the investors who use our platform to list their properties, are our growth engine.”
Part of a Mission for Public Good
Because the PadSplit platform facilitates rental properties on a co-living model, residents of these properties often are low-income workers who might not qualify for a traditional rental.
When would-be residents cannot qualify for traditional rentals, which typically require relatively strong credit scoring and an income roughly three times the amount of the annual cost of rent, they have historically been forced into unstable situations in which they are couch-hopping or relying on homeless shelters. Co-living via the PadSplit model, however, enables a resident to pay far less than local market rental rates and provides them with additional benefits like reporting of on-time rent payments that can improve credit scores, job-matching, and telemedicine.
“Our goal is to help these individuals stabilize their situation or ultimately transition to more permanent housing of their own,” Franklin explained.
While listing co-living opportunities on a web-based platform may be a relatively new concept, co-living itself is older than recorded history. In modern history, co-living can be traced back to 19th century-era boardinghouses, but Neolithic longhouses date back more than 7,000 years.
“We did not invent co-living, and we did not even reintroduce it,” laughed Furman. “This is something that exists in every municipality in every area from college students housing together to seniors who want companionship. We like to think we do it better.”
At its founding five years ago, PadSplit was structured as a Public Benefit Corporation. Unlike a nonprofit, which does not have owners or shareholders, benefit corporations, sometimes known as B corporations, have shareholders and expect to generate returns. However, public benefit corporations are mission-driven for social and public good and offer enhanced accountability and transparency to investors and shareholders.
“Our mission is a huge part of who we are,” LeBlanc said.
Franklin chimed in, “That social-impact component is so important to our investors, especially those who are interested in owning properties or assets in markets that really allow them to make an impact.”
The Tougher the Market, the Better the Odds
Another aspect of PadSplit investing that appeals to many real estate investors these days is the split-rent system that maximizes rental income on each property. “In major U.S. markets, [traditional] rents are lagging behind,” said Carl Bassett, a PadSplit investor who began converting his traditional rentals to PadSplit rentals in 2019. “If you are keeping assets as rental properties, these days there may not be enough rental cash flow to catch up with the cost of acquisition,” he explained. “With current prices and interest rates, you can end up in a zero-cash-flow situation. Using the PadSplit model, I can invest in bigger cities like Las Vegas, Tampa, or Orlando, where [acquisition] prices have recently gotten a little too high to keep most properties as [long-term] rentals.”
Basset currently holds both traditional rentals and PadSplit rentals in multiple markets including Las Vegas, Nevada; Kansas City, Missouri; and Tampa and Orlando, Florida. He has been investing in real estate for more than 20 years, buys more than a dozen houses most months, and is actively engaged in converting many of his eligible traditional rentals to the PadSplit model and acquiring more assets that are a good fit for co-living.
“This product works in any economy, going forward I can expect high cash flow, and I still have an appreciating asset,” he explained. “On top of that, I’m participating in co-living and I’m helping solve a problem.”
Creating a “Bread-and-Butter” Solution that Lasts
From the beginning, PadSplit’s founders knew the only way to make co-living a viable option for residents who desperately needed this type of solution would be to bring property owners on board. That meant the solution had to generate returns and be appealing enough to lure experienced investors and those with large portfolios away from strategies that had traditionally worked and been generating predictable returns for decades.
“Once most real estate investors find their ‘bread and butter,’ they stick to it,” LeBlanc observed. “They just want to keep going straight down the fairway.”
As a result, the company relied and continues to rely heavily on word-of-mouth referrals from one investor to another. “We have seen property owners earn twice what they would earn on a net-cash-flow basis running a property as a co-living rental instead of a traditional single-family rental,” LeBlanc said. “That is the sort of thing that, when an investor hears it from another investor using PadSplit, converts a lot of doubters.”
Investors like Bassett are happy to spread the word, knowing that the end result of co-living is that residents in these properties are able to move into traditional rentals or homeownership at some point in the future.
“There is such a strong need for the bottom rung of housing that we cannot have too many options for people who have very few options at all,” he explained.
Bassett recalled one of the first properties he launched in Las Vegas, which had its first resident move in about two hours after the property listed on the platform. “She is a nurse who works in a Las Vegas hospital and has to travel into Vegas twice a week,” Bassett said. “Previously, she was staying in expensive weekly hotels for about four times the cost of having her own space in our PadSplit and it was eating her salary up. Within two days, that first property was fully booked with solid residents who really needed this option, and that demand remains very strong.”
One of Furman’s favorite success stories also revolves around a resident who was commuting at great cost to herself. “Lora is a sous chef at a university in the city and had been commuting from more than an hour away to get to work. She had been sleeping at the airport because of the cost of gas and so she could work more hours rather than spending those hours in the car. She rented a room from us that was just 15 minutes from her job by bus, and it changed everything,” Furman said. The chef was able to work five days a week instead of three, bring down her expenses dramatically because she no longer needed her car or to buy so much gas, and was able to sleep safely in her home instead of at the airport.
“She stayed with us three years before getting her own apartment,” Furman recalled. “There’s nothing magical about co-living; it is just a room, but it provides an opportunity that people have not had before.”
SIDEBAR 1
Taking a Chance & Making a Difference
While PadSplit is designed to minimize risks for investors, many hosts find themselves electing to take educated risks on renters. Frank Furman, chief growth officer and co-founder of PadSplit, discussed this type of decision and how it has affected one of the company’s earliest investors, a woman who currently has seven PadSplit properties. She recently was able to quit her job along with her husband and enjoy travel, financial flexibility, and the empowerment that would have, Furman said, “been impossible” before building her portfolio. “She is 45 and retired,” he said.
As the investor became more comfortable with the platform, she elected to take an educated risk and house residents who, in some cases, might not have passed traditional background checks for renters. “I will always love and respect her for that,” Furman said proudly. “When she was a working mom and just starting out [owning rentals], she made what some people would have called an irrational choice and it made a difference not just for her but for those residents as well.” He concluded, “Our core conviction has always been that if you can make affordable housing generate higher yields than traditional housing you will solve the affordable housing shortage. By optimizing the energy, capital, and creativity of our investors, we are meeting a huge need on multiple fronts.”
SIDEBAR 2
How It Works: PadSplit A-Z
Although the concept of co-living is relatively simple, the process of bringing in multiple residents, charging them weekly rent, handling utilities and the interpersonal dynamics that come from putting four or more people in a shared setting, and dealing with the logistics of collecting rent and managing a co-living property is not simple at all. The PadSplit platform is intended to facilitate and solve the more complicated aspects of co-living through technology. In a nutshell, here is how it works:
From the Host Side
» Investor decides to invest in a co-living property and acquires or converts that property by consulting with PadSplit on how to estimate utility use, draw up a resident agreement, and lay ground rules for house behavior and protocol.
» PadSplit assists with identifying needs for furniture, optimizing space for co-living income, setting rental rates, and listing the property on the platform.
» Residents sign up to rent rooms after passing a required screening and background check. There is no minimum credit score and there typically are deposits required on the rooms. Although evictions do not automatically disqualify renters, usually an applicant with more than two evictions in the last seven years will not be approved.
» Residents sign relevant agreements, pay first week’s rent, and move in, often within the next 48 hours, and sometimes within the next 24. There are no on-site tours for residents prior to booking to preserve the privacy of existing residents.
» PadSplit collects weekly rents, handles local issues including complaints from neighbors, and begins offering residents credit-reporting services, job matching, and telemedicine.
» Investor/host receives monthly payments from PadSplit, while the platform helps reduce vacancy costs and handles resident management.
From the resident side
» Resident looks for rooms in the area of their choosing.
» Resident selects a room and applies to live in the PadSplit property. Typically, there will be access to a 3-D virtual tour of the home.
» Resident passes background check, income verification, and identity verification and signs appropriate documents.
» Resident pays first week’s rent, and moves in.
» Resident participates in job-matching, credit-monitoring, and telemedicine options as well as saving money. In many cases, residents eventually transition to living in an apartment or house of their own.
PadSplit Markets
(as of September 2022)
» Atlanta, Georgia
» Dallas, Texas
» Houston, Texas
» Jacksonville, Florida
» Tampa, Florida
» Richmond, Virginia
» Indianapolis, Indiana
» Las Vegas, Nevada
» New Orleans, Louisiana
» Orlando, Florida
