Coliving based real estate investing is a very profitable and stable investment model. HomeRoom is one of the fastest growing coliving companies in the U.S. on a percentage basis. It is based in Kansas City with properties in Dallas and Fort Worth, Texas. CEO Johnny Wolff gives us the details on this turnkey investing model and why it’s definitely worth considering by investors.
Johnny used to work as an analyst in the Bay Area doing financial modelling. He even did work for the billion dollar game franchise, The Sim 4. But he realized that working in Silicon Valley and investing in property in the Bay Area is a slow, difficult, and almost impossible process.
So in 2015, he moved to Austin, Texas and decided to go full-time doing real estate investing. Prior to that, he’d done some careful planning and modeled each property he would purchase.
He already had a couple of properties in Texas that he was house hacking and renting by room. But after reaching a certain level of scale, he realized that he didn’t want to be self-managing everything.
Johnny saw the demand of investors living in California and wanting to invest out of state in turnkey properties. This led to him starting HomeRoom.
It is coliving or roommate living with luxury apartment amenities. Their typical demographic are young computer engineers aged between 21 and over with an average age of 27 and a credit score of 700.
The beauty of their room by room rental is that tenants are actually paying 30% less than when renting an apartment or a standard single house.
On the investing side, investors pay to furnish the common areas of the property and benefit from cash flow doubling on a percentage basis.
HomeRoom works to help investors find those properties and find other similar rentals in the same neighborhood. In the process, they are able to create more money for their investors and a better experience for the tenants.
HomeRoom has properties in Kansas City, Dallas/Fort Worth, and Austin. Before choosing the city, Johnny would do a demographic research. He chose Austin as their first location because it has the highest appreciation over the next 5 years.
Kansas has some appreciation, but Johnny focused on long-term cash flow because the tax rates were low. And for him, Dallas presented a huge market he wanted to tap on.
Johnny believes that prices will continue to increase due to inventory scarcity. We’ve been underbuilding for 10 years, and unfortunately, we cannot just quickly create 4 million houses. He expects a light dip in prices to happen, but recommends that investors buy properties as soon as they can.
People such as flippers doing remodels have been finding contract help very challenging. He’s seeing builds previously costing $900,000 which now cost $1.7 Million because all the labour is getting taken up. Contractors nowadays won’t even accept small jobs.
He also expects taxes to increase faster than rents. Unlike California which has Prop 13, other states do yearly re-assessments on property taxes. This means for him that in Austin, cash flow goes down over time. Taxes are high. Appreciation is high. These lead to cash flow going down on an inflationary basis.
Johnny suggests investors buy somewhere like Kansas City, which has a cash flow-focused market.
HomeRoom helped an investor purchase a 4 bedroom, 3 bath property in Kansas City for $210,000. It was already a rental property earning a gross of $1,650 a month.
After converting it into a 7 bedroom, 3 bath, it currently earns a gross of $2,750 in rent after being fully occupied.
With their coliving based real estate investing, property owners earn 60% more when renting out and tenants do great property care. On top of rent, tenants pay for a monthly maid service, yard care, and gutter cleaning. No pets are allowed, and there are also no kids.
They have 2 revenue models: a revenue sharing model and a guaranteed rent model.
With the above example, in the property management agreement or revenue sharing model, the investor would get around $2,400-2,500. In the guaranteed rent model, they would get $2,200.
The coliving situation attracts the type of people who love going to a new city, living with roommates, doing dinner parties, and meeting new people. Ages are 21 years and above. There are aso older tenants, but the important thing is there has to be a good fit. So roommates will interview the new potential roommates.
They have a minimum stay requirement of 3 months. HomeRoom is listed on 20 platforms including Airbnb and Zillow. The market itself is very splintered with people looking all over the internet for rooms to rent.
Johnny’s goal is to consolidate so that people will only go to one place – HomeRoom. In 3 years, they want people to find them through their platform and not through their competitors.
Each tenant gets a code for the property’s front door. Regular keys are provided for their rooms.
HomeRoom implements a very rigid screening process including background and credit checks. They have over 400 roommates now. To avoid conflicts, they do quarterly meetings where people can talk to each other, and air their dirty laundry to clear out the air.
They also have an escalation process if there are complaints. So far they have only needed to deal with asking people to leave 3 times.
HomeRoom holds the master tenant and a lease is in place before you can buy. Most lenders see them as a long-term rental.
When it comes to bathrooms, they want to keep a ratio of 3 people to 1 shower. More than that is problematic. To solve this, they will jailbreak the master bathroom by creating a hallway into the master bedroom. This allows access to the master bedroom for other roommates.
Making the conversion permanent or temporary is a decision made by the investor. Permits are not always needed, but anything that adds a livable square footage requires a permit.
It might cost a couple of thousand to do a bedroom conversion. Adding a single wall costs between $1000-2000. And this could be paid back through rental income in 2-3 months.
HomeRoom just shows the numbers to the investors and tells them about different challenges. The decision is still up to the investor.
HomeRoom was lucky. Since 2019, they have been doing remote leasing. They do video calls for leasing calls, and virtual calls for roommate interviews. Key codes are just sent online. With the pandemic, they didn’t have to make major shifts. They only needed to build an intense regimen for when someone contracts COVID. So far, only 3 houses got the virus, and only 1 case where a roommate infected others.
HomeRoom stayed 100% occupied during the pandemic. They initially had big growth plans for Q2, but instead decided to slow down and coast out the rest of the year. They still expanded to Dallas in September 2020. In a way, they actually benefited from COVID.
Single family rental properties have great appreciation and some cash flow. They are relatively stable, but have big zero dollar months.
Short-term rentals have a lot of volatility. During the pandemic, this kind of rentals got screwed. Also, while they make way more than single family rentals, they require a ton more work.
Coliving provides the benefits of a multifamily and the appreciation of a single family. It makes more money than normal rentals, but less than short-term. However, it needs way less work and is more stable than both. HomeRoom has never had a house with a complete zero rental because even if 2 out of 6 roommates move out, they’d still be earning from the remaining 4.
While Johnny doesn’t know many details, he believes that Hub House made some key mistakes. One, they treated their real estate company as a technology startup and were building out bespoke technology early on and burned through their capital.
Second, they didn’t bring in people with awesome property management backgrounds early into the company. In a way, they may have run out of luck as COVID hit while they were in the worst spot possible.
HomeRoom was starting out at that time, so they weren’t buying the furniture. Instead, they had investors buy the furniture.
Johnny believes that it’s good for the customer if the business model is sustainable.
Like any turnkey provider, it all starts with meeting and talking with the investor about buying. They go through a second call to go over initial deals. The final step is to connect them with an agent who will find them a coliving property to buy.
HomeRoom employs a lot of VAs who search through an MLS everyday. Once a deal is found, HomeRoom does the analysis and sends it to the investor. The investor can then make an offer and buy the property
Once the purchase is closed, HomeRoom takes over and does the repairs or renovations. Investors can also set it up themselves if they choose to. Renovation costs are on a case-by-case basis. Repairs and building walls can cost up to $10,000-20,000.
The property is then furnished. HomeRoom offers a $5,000 package which includes the furniture for the common areas, kitchen, smart locks, smart hub, and thermostat.
When a roommate moves in on day 1, he/she can already cook, eat, watch tv, and go to sleep. Everything is made ready for coliving.
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