The Co-Living Strategy
A Proven Approach That Leads to Increased Profitability
By Frank Furman
Today’s housing market is not for the faint of heart. From delays in permitting to rapidly shifting moratoriums, to inadequate rent relief programs, being a property owner has never been so challenging. For those of us paying attention, though, this challenging environment is also leading to a bevy of new opportunities.
One growing trend is co-living. According to Cushman & Wakefield, the co-living sector grew to more than 7,000 beds by the end of 2019. This is not surprising — more companies have entered the space recently, creating purpose-built co-living units, converting multifamily units or even turning hotels, warehouses and houseboats into communal living. In fact, this number is a big under-representation based on what I’m seeing. My own co-living company, PadSplit, already offers more than 3,500 units today, and we plan to triple this number by the end of 2022.
So, what is causing all this interest in co-living?
Shared Housing is Already a Proven Approach
There is a lot of buzz about co-living lately. But many people do not realize that co-living is actually not a new idea at all. Co-living, or as it was called, boarding, was an extremely popular and widely accepted form of housing throughout the 20th century. Many individuals who worked in factories boarded. Families lived in duplex homes alongside other families and shared common areas. Net: this isn’t a new idea at all, but rather the rebirth of a proven concept. Of course, we’ve always had co-living for college towns and senior housing.
More recently, AirBnB deserves credit for normalizing the idea of sharing a home to increase profits. Co-living is a different approach for a different use-case, sure, but “house hacking” overall is now a common practice for new and experienced property owners, and in every city in the U.S., not just vacation destinations.
The Numbers Don’t Lie: Co-living is Leading to Increased Profitability
The other big reason co-living is taking off right now is because of the increased profitability operators are seeing from the model, which are in part due to the demands from today’s housing market.
Regardless of where you live, there is a shortage of housing inventory for both buyers and renters. This shortage is caused by a myriad of issues from over-reliance on single-family housing creation, to pandemic effects, to the changing size of U.S. households. For the latter point, consider this statistic: according to AARP, in the U.S., 73% of the population is made up of small households, but only 12.5% of the housing stock comprises studios and one-bedrooms.
Thus, no matter how you slice it, there is nowhere near enough housing supply today to meet surging demand. Co-living provides an attractive and pretty simple solution when you think about it. We can take the existing single-family homes today, create a few more bedrooms, and instantaneously create more supply. In doing so, property owners are also maximizing their net operating income generated by square foot. We have certainly seen this at PadSplit. Over the past four years, our property owners have increased their NOI by more than 2X when converting their homes to co-living through our model.
Another financial benefit that appeals to property owners is increased diversification for their real estate portfolios. Co-living is a different type of asset class from offering an entire single-family home to one family as well as a different use case from AirBnb, which is more seasonal
in nature. Introducing co-living into your mix immediately allows for further risk mitigation since it is essentially getting into multi-family investing with a lower barrier to entry.
Doing Well and Doing Good in the Community
Profitability alone is a big driver, but co-living is also meeting the moment we are in. With record low levels of inventory, and increased demand that leads to a higher cost for traditional rentals, it is easy to see why the affordable housing crisis is only getting worse.
Building our way out of the crisis is too costly and slow, so it is necessary to make better use of the residential resources we already have. Co-living spaces, regardless of the audience they are intended for, are almost always more affordable than median rents for traditional studio or one-bedroom units. As a result, co-living enables operators to not only do well financially, but also meet their community’s needs, whether it is for young professionals moving to a new city or in the case of my company, offering workforce housing close to job centers.
Like it or not, landlords get a bad rep — so why not do well and do good?
How to Get Started in Co-living
If the above points were not enough for you, another proof point is that with real estate, those who show up early often realize the biggest benefits. Look back to 2008 and 2009: the independent real estate developers who scooped up as many single-family homes as they could are certainly seeing the rewards from taking on that risk.
The same can be said for co-living. Operators who get in early on the model will stand to benefit most as the trend continues to take off.
To be fair, there are some challenges with co-living. There’s a steep learning curve for buying and readying the homes, as well as integrating new technologies for payments. There is much to learn about efficiencies for shared utilities and common spaces. There are regulations to be mindful of as well.
But at PadSplit, we talk to property owners everyday who are fully bought-in to the model and most are doubling down in the space. In fact, 70% of our property owners choose to expand with us and offer more units after their initial commitment.
For anyone considering co-living, I advise speaking with property owners who have entered the space before. And as always, do your homework to partner with credible companies and marketplaces who are familiar with the concept. There is no question that co-living is a growing trend, so it is an important strategy to consider.
