Shared Housing: How Investors Can Double Their Income And Solve The Affordable Housing Crisis

Atticus: The Cajuns don’t pronounce the C, but most other people do, so it’s just fine, Toby.

Toby: It’s pronounced luh-blahn?

Atticus: Luh-blaw, luh-blaw. You just pretend you’re a Frenchman.

Toby: My brother’s down there in Slidell. He’ll probably call me up and say, dude, what are you doing? You Cajuns.

Anyway, we’re going to be talking about something that I think is a serious issue in the United States. I’m going to ask somebody who’s an expert in this because this is an area that they spend their entire life in. That is shared housing and the issue of lack of affordability of places to live. For landlords, what you can do about it, what platforms there are to do about it.

I think this is as disruptive as something like an Airbnb was for leisure travel. I think shared housing is something that is vitally needed, so I invited Atticus on. I’ve known Atticus and his brother-in-law for a number of years. His company is called PadSplit. I would urge you to check it out, but I wanted to let Atticus to come on and explain the what and the why.

I know that they’ve done super well because I have clients that have units. The cat’s out of the bag. It increases your net by about 100%. It should double your net. Is that a fair statement, Atticus?

Atticus: It is, indeed. The average is about 130% increase to your net.

Toby: Wow, okay. If you have a typical rental property, you’re renting it for a couple of thousand a month or something, let’s say you’re netting $12,000 a month, simple math, this could push you into the $24,000–$26,000, $27,000 range?

Atticus: Exactly. One of my favorite stories is from our first outside host other than myself. She was working from home, basically stay-at-home mom monitoring. She was trying to get into the real estate space, had a couple of rentals, and now she has nine and is moving abroad to live in Spain and had her husband quit his job. It’s certainly been a viable path for financial freedom for her and a number of our hosts.

Toby: It’s interesting you say that, because I’ve had folks pursue this model. They didn’t even use the ease of PadSplit, but they did it themselves through house hacking in a local community. I was shocked to find people who retired off of three properties. I said, how the heck do you retire off of three properties? Once they break it out, they’re renting them out on a weekly basis, individual rooms. I think it was $200 a room, $250 if it had its own bathroom.

The numbers are crazy because $200 a week, everybody thinks $800. It’s actually closer to $860 or something like that. These guys do really well. Explain what it is. How somebody that’s listening who’s a typical landlord, how they might maximize this. Or better yet, just anybody out there, explain what it is and how they could actually participate.

Atticus: Essentially, the easiest way to break it down is to think about how much space is in your home that’s not really being monetized, or even for the existing bedrooms that people are paying to rent in a traditional model, how much of those are worth.

The traditional real estate landlord pricing paradigm looks at, okay, the first bedroom is really the only one that is equal to market rate. It has a higher price per square foot than any subsequent bedroom. Your second bedroom and a home is not worth two one bedrooms. Your third bedroom is certainly not worth three.

With each additional bedroom in a traditional model, the pricing gets lower and lower and lower to the point where if you have a five-bedroom house, you’re almost not really getting paid anything for it. Certainly if you have a six bedroom, that additional bedroom doesn’t add any incremental value.

Then you think about a space like your formal dining room. What is really the difference between a formal dining room versus a bedroom? If you take away the furniture, you think about the four walls in the room, especially if you have a butler’s pantry area. There’s even a closet there.

The answer is not much. Usually, it’s a door or how the doors are configured. If you have a door on that room, the answer is really just the furniture. As a real estate investor, I can almost guarantee you that no one ever earned a penny for their formal dining room. Whereas if you can rent that as a bedroom to a single individual, you can absolutely capture real revenue from that particular space on the order of $600, $700 a month net.

Same thing with that fourth, fifth, sixth bedroom. What this model allows us to do is to say, okay, we’re going to price that first bedroom at 60%–70% of whatever the market rate is for a one bedroom apartment. Each additional bedroom will be priced at the same rate or similar rate, so those returns become incremental, rather than diminishing. That’s really where you start to see that trade-off and why people are able to double, or in some cases, triple their income off of the same asset.

It’s simply by taking advantage of that wasted underutilized space that hasn’t been monetized previously, and being able to market through PadSplit to individuals who need more affordable properties. They are single individuals generally working in your community at the grocery store or at the post office and delivering packages.

You see these folks every day, but it’s shocking to understand how big a portion of the rental population they are and how much they are locked out of traditional market rate options. You’re solving two problems at the same time by providing access to individually furnished rooms with all utilities included in each one of these properties and charging a below market rate. Even while charging that below market rate, you also can net significantly more dollars.

Toby: I remember this. Two things. When I was going through law school, this is actually what we did. Where I went it was in Tacoma, Washington. It was the Seattle University School of Law, which is weird because when I started, it was in Tacoma, then they moved to Seattle. You would have these houses and these people would put bedrooms in the attic.

In the end, it was six students in a house. Is that essentially what you’re doing, you’re creating separate spaces so that you don’t need a formal dining room. Instead, let’s have another bedroom that I can rent for $600–$700 a month? Is that what you’re doing?

Atticus: Yeah, absolutely, or if it’s a daylight basement. As you start looking around traditional single family homes, you start to see that there’s wasted space in a lot of these. No surprise, even from a macro level, we know that the size of an average single family home has tripled over the last 60 years. Meanwhile, I think everyone recognizes, okay, you’ve got the boomer generation that’s living longer and the millennial generation who’s staying single longer.

Family sizes have declined around 25% over that same period. What that means is you have a ton of singles that are looking for spaces that are appropriate and suitable for them, but you have this existing, largely single family housing stock that is 75% of our housing inventory that is just way too big. As a result, there’s a ton of waste. You could really solve the affordable housing shortage, as we were talking earlier, five million-plus homes with just a small fraction of the existing homes existed.

Toby: Freddie and Fannie. Not everybody was hearing our conversation because it was before we started recording, but we were talking about the housing shortage. Actually, the National Association of Realtors came out. I think they said it could be as high as seven million. Freddie and Fannie saying it’s over five million.

You have other census and some of these other organizations that are saying it’s 3.5, 3.8, because we’re under built. Then you have the Harvard Joint Center for Housing come out last week and say that we are under building by about half a million units a year because of all the millennials that you just mentioned. They want to go out on their own, there’s not enough housing to supporting, there’s an affordability crisis, and they’re at a housing disadvantage, the housing is too much.

The builders aren’t building houses that are small anymore. They’re building things that are big like you just said. Actually, everything meshes. We have big houses and not enough rooms to house everybody. What do we do? This isn’t a three-bedroom, two-bath, hey, let’s make it and rent out three rooms, is it?

Atticus: The short answer is it could be. We have a wide range of housing choices available on our site, whether it’s one bedroom. I have rented a bedroom in my personal home all the way up to eight-plus bedrooms depending on the house. Sometimes it’s a duplex with multiple units configured. We’re actually launching one now that has two five-bedroom units in the same home.

You can certainly see all aspects But in regards to the question around three-bedroom, two-bath, the short answer is it could absolutely be. You can generally assume between 250–300 gross square feet per bedroom in a house. If that three-bedroom, two-bath is 1800 square feet, then you could very reasonably assume to get six bedrooms out of that space. If you compare a six-bedroom PadSplit income relative to the traditional three bedroom, chances are you’re going to be more incentivized to convert that property as opposed to running it as a traditional rental.

Toby: Yeah, because on typical rental, that extra three bedrooms isn’t yielding much. A PadSplit model, it’s yielding just as much as the first three, right?

Atticus: Yeah, exactly right. Our model is a little bit different in that we have all of our hosts include utilities and furniture in those units. That upfront investment can absolutely be more, and we set certain brand standards and minimums in order to list on the platform to begin with. But when we say you can expect two plus X on average, that actually assumes a return of capital investment as well to make those upgrades.

Toby: This really does sound a lot like Airbnb. Maybe you could explain what PadSplit is and how somebody uses it so that they get a better feel for what we’re talking about here.

Atticus: I should back up a second. I’ve spent my entire career in the housing industry. I started with house hacking in 2009. I started buying single family homes. First one was in 2005 and then got heavy into it in early 2008. Through that process, I saw a lot of these houses that had been hacked. I was wondering what exactly was going on.

I happen to have one next door to me. Their house was being foreclosed. They were going to be removed. They asked if they could come rent rooms for me. It was two individuals, Otis and Mitch, that were on Social Security income. I said, yeah, absolutely. You can rent rooms in this house.

Over the next several years, I had probably 450 active units at that point and just started comparing the P&Ls of this house relative to traditional single family rental, the Section 8 Housing Choice rentals, multifamily rentals, and saw that pound for pound, this was far and away the best return. The challenge was it was a lot of work. I had to go physically to the houses pretty often, we were collecting money orders.

Toby: You were a boarding house, right?

Atticus: Yeah, it’s effectively what it was. It was a four-bedroom house. We did convert some other ones through my personal portfolio over the years. Interestingly, the third person who was in that home was a woman who worked at McDonald’s. She’s still there today, since 2009, paying week to week. Some folks will absolutely stay for a long, long time.

As the years progressed, we had some exits in 2014 and 2015. I said, okay, well, what’s the next stage of my career? I revisited this issue because I was interested in solving that affordable housing shortage that we spoke about. I thought, okay, this is really aligned incentives between the resident population that I know needs lower barriers to entry and more housing choices. It’s also much more profitable for the investors that I know have seen them change entire neighborhoods wholesale.

How do I really bring these two things together? That was by creating this platform marketplace. We really do three things to solve the problems and the pain points that I had as an investor who was just using this house hacking, boarding house strategy.

The first was, how do I create a consolidated source of lead generation to market to all of these potential leads of people who need this type of housing, where they can come in, they can see properties, they have choices, they can get screened and vetted very, very quickly, usually just within a couple of minutes, and they can move in potentially within 48 hours? That’s the first bucket of things that we do. We spend a tremendous amount of time, energy, effort, and dollars, to make sure that our marketing is absolutely fantastic. We can get people through the funnel very quickly.

Toby: I know that you have the other two. Somebody goes onto your site and they get approved to move into a place. Is it some background checking and things like that that’s integrated into the site?

Atticus: Exactly, yeah. Identity verification, background check, income verification as well. We want to see that they don’t have too many evictions. You can run through that process very quickly. We charge only a $19 application fee, but we can process those super, super fast. We can usually book rooms faster than anyone.

The second bucket is the payments processing and collections piece. One of the major reasons why, as an independent operator, I had to go out to the property all the time, was usually to have some collections discussion with that resident. I think every landlord is familiar with some of those conversations and would prefer not to have them. We handle that entire aspect, where we have both a number of technology tools that are sending out automated cadences of messaging to these individuals, and then we also have in-person staff that is calling them, reminding or working on payment plans as needed.

Toby: If you have six people in your home, you’re not dealing with six different people, they’re dealing with PadSplit. PadSplit handles all that, you just get a check every month.

Atticus: Correct. The other issue is, if you have six people in that home and you need to bill all inclusive weekly in order to derive a very high collections rate, we’ve consistently been at 97% plus effective collections since we started.

Toby: Hold on, 97%?

Atticus: Yeah.

Toby: I’m sorry, because most people are going to look at this thing. They’re renting a room. These could be people that I’m having to chase after, have eviction risks, and things like that. And you’re saying it’s 97% collection?

Atticus: That’s correct, yeah. By the way, we don’t require minimum credit at move in. The secret sauce is really weekly or customized billing cycles. The scenario I run through with folks is, what day of the week is July the 1st? Nobody knows. Even if it’s just the next month, what that day of the week happens to be, but you know what day of the week it is right now. You know what day that week, you get paid.

If every Friday, for instance, you know that you have one bill that you have to pay, you’re very likely to make that payment versus the first of the month is when that rent is due, your water bill is due on X day, and your cable bill is due on some other day. It shouldn’t be a surprise to any of us that someone who’s living paycheck to paycheck has a difficult time budgeting.

Toby: Coming up with that money right there. And there are five days grace, isn’t there? Is it the 1st? You’re like, it’s due on the 1st.

Atticus: Right. For us, if you have six people that are running that home and you have weekly payments, guess what, you’re now at 25+ payments per month. As a landlord, chances are, you really don’t want to have to negotiate, figure out, or even track those 25 separate payments in that home. Forget about if you have 10, 20, 30, 50, 100 houses, which some of our hosts do. It becomes just a logistical nightmare. That’s a big piece of what we do as that second bucket.

Toby: That’s two things. You find the people, they can do the application through your app, they can come in, they go down, and you’re just providing the room. You do all the collections, you do everything, and you just bring it to the property owner. What’s the third thing?

Atticus: The third thing is the set of technology tools and customer service. We have 24/7 customer service that is built around resident relations inside the home. Dealing with issues like, Johnny stole my peanut butter, Susie’s playing music too loud, someone keeps leaving dirty dishes in the sink, all of the headaches that our hosts don’t really want to deal with.

Toby: You can deal with that?

Atticus: We deal with a lot of it. How do you mitigate those concerns as much as possible? One with technology tools such as member to member, house messenger applications, or chores trackers on who did what when. How does a resident give a call out, shout out, or an overall rating to a roommate in the home or report some untoward behavior? All of those things come through us and we filter it.

Toby: Do you have a rating app? Like I can rate my roommate, you’re getting a one? You keep putting dirty dishes in there and you don’t do anything, you’re getting a one. What happens if they’re just a really bad rating? Do you boot them? What do you do?

Atticus: Yeah, we can. If they consistently break the established house rules, then their PadSplit membership is terminated.

Toby: You just made everybody’s day that has had that. Like, they eat my peanut butter. I know they ate my peanut butter. Who ate my peanut butter? Now I can just be like, […] and hack them off.

Atticus: Yeah, pretty much. Our customer service staff does a lot of, let’s just say, people management or an ex-officio parenting.

Toby: You’re a babysitter sometimes. Everybody needs a little babysitting. How bad of a deal is it? I can only imagine. For those of you who had student housing, imagine you deal with this. If you’ve got hotels, I’m sure you deal with it.

Atticus: It really, really depends on the house. Sometimes it’s just absolute crickets. Everyone either gets along..or in a lot of cases, the first PadSplit home that I onboarded in 2017 was really the first prototype for this model. I’ve had a guy who’s lived there since the beginning, since June of 2017, and he still doesn’t know two out of the six people in the home. Just hasn’t seen them, doesn’t know who they are, doesn’t know their names. He’s lived there going on six years.

Sometimes it’s radio silence. Other times, it’s just absolute pandemonium and we’re getting calls all the time. It’s like, oh, not that house again. At this point, we are the largest marketplace for co-living in the US. We see a ton of use cases. We’ve probably had 14,000 stays at this point. It’s a lot of data. We’ve seen just about everything that there is to see.

Toby: There are two things. You probably know what the prevalence of the issue is, but you’re taking it off the plate of the landlord anyway, or at least the property owner. You said something that was interesting when you said the US, because I have a brother in law in Bristol in England right now. This is exactly what they do.

They have boarding houses, for lack of a better word, where they have roommates. I was just thinking, he hasn’t seen his roommates. He’s in school, he’s doing a master’s program. It’s mostly people that are around Bristol or University of Bristol, and he just doesn’t see them. He’s like, yeah, I don’t see my roommates at all. Sometimes it’s weeks. Is that what this really is? Is that the reality?

Atticus: It can be Yeah, it absolutely can be. It really just depends. Again, the overwhelming majority of folks who rent with us are working full time, sometimes two jobs, sometimes the night shift. You’re working day shift, somebody else is working night shift. You might just never see each other, even if you live together for years.

In other cases, they’re cooking Thanksgiving dinner together. We had one house where they all took a trip to Miami together. It really just runs the gamut. They’re really buddies, but I think a lot of it just happens organically.

Toby: Here I am. I’m going to ask you the main questions. Let’s say that I’m a landlord. Immediately, when I think about weekly rentals, I start thinking of transient people, tons of turnover, having to replace, what do I do if they steal my blankets or whatever? Is any of that stuff an issue of how bad the turnover?

Atticus: Here’s one of the secrets that we really don’t talk about or promote very much, but something that I recognized from the earliest days when I was just house hacking. Take away the increase in real time net rev, which is around 2X. Assume that it’s par. You’ll see about a 20% improvement in the performance of your properties simply because of turn costs and vacancy costs.

When you have a traditional single family rental, and the period of time between when someone moves out, even if they’ve been there for years, the time that they move out and the next person moves in, and the cost that you need to get that unit make ready again, those two costs effectively disappear in a rent by the room model.

For me, in my personal experience, where we always tried to have pretty decent properties, you would think you’d be making great rent for years. Then all of a sudden, that tenant moves out and you incur a $12,000 re-renovation bill. All of the profit that you thought you would make just goes out the window.

In a rent by the room model, you have one vacancy out of five, six, seven, eight, and you don’t see that. The cost of turning that room is limited to that individual room. You’re not re-renovating the kitchen, you’re not replacing all the flooring, you’re changing the mattress cover and doing a rough clean of that individual room. On average, it’s less than $100 just for that turn.

Toby: You’re not doing what an Airbnb does, right? Are you providing sheets and all that stuff?

Atticus: Not usually. We have a very, very small minority of hosts that do provide bedding. By and large, this is a mattress cover. We advertise for all of our incoming members. Hey, these are the things that you need to get. It’s your cleaning supplies, your bedding, and anything else that you might want to outfit—.

Toby: What about things like cable TV and stuff? Is that included? Do you have to deal with that?

Atticus: Wi-Fi is one of the things that we expect our hosts to provide. But in this day and age, with all the streaming services, every resident usually has their own service of their choice.

Toby: They don’t need it, right?

Atticus: Exactly. That said, we do have a couple of hosts who have smart TVs, and they’re really looking for premium rents in those properties.

Toby: I can see it. I used to have a buddy. He’s still my buddy. He was always telling me what he would do to get bigger rents. He’d put fans in the rooms and charge more for it. He would take a garage and he’d make it into a room. In all of his houses, you’d always get the three-bedroom, two-bath, and then he’d convert the garage.

He was always like, I got an extra rent, I got another room, and all that stuff. You just put that on steroids is what you guys did. You created a platform to take away the headache for people. What’s the catch? What am I missing here? Why wouldn’t more people do this?

Atticus: There’s certainly still a market for single family or a partner house. We are a small fraction of the overall market. I do think, to your initial point, it is more work than a traditional rental. I would say it is less work than an Airbnb or traditional STR, but it is more work than a traditional rental.

If you’re looking to set it and forget it, there are passive ways to do this, but you need to hire a property manager. If you’re trying to be the operator and you’re trying to be passive, those things don’t really work.

Toby: Is that what you can do? It’s like, hey, I’m going to work with PadSplit, but I’m going to hire a property manager to deal with everything else. Are they just as much? Tell me the numbers of this. PadSplit must cost X, a property manager must cost Y. Is it worth it?

Atticus: The short answer is yes. Those averages that I’m quoting from the net increase include paying a third party property manager as well.

Toby: That’s net operating income doubling. That includes that you’re going to pay more for the property manager, like I’m paying something to PadSplit, right?

Atticus: Correct. Our pricing model today is just flat 12% of actually collected revenue. There’s no upfront leasing fee. We spend a ton of money on marketing, but we don’t actually pass through those costs. It’s just a percentage of revenue, which is about two points cheaper than what Airbnb charges, which was how I put my finger in the air in 2017 and said, hey, what’s my business model?

All right, let’s figure out what Airbnb is effectively charging between what they charge to the renter and the host, come in lower than that, and here’s your number. Then different property managers work on different fee structures. Some are fixed fees. Some are percentage of revenue, but there are a decent number of them in the market today.

Toby: It’s lower than you would just for a regular old because they’re not having to find anybody, they’re not having to deal with it. You guys are dealing with most of the issues. Realistically, what are they doing? Go over there, cleaning a toilet once in a while and basically keep it clean?

Atticus: The overwhelming majority is responding to maintenance issues. There certainly are some things. The local reps, the local property manager, are still the ones. Let’s say Johnny steals peanut butter one too many times and their membership gets terminated, we will try to talk them through moving out voluntarily as PadSplit. But if Johnny doesn’t move out, we have a problem, it is a physical problem on site, and someone needs to file for that eviction. We’re building the flow to make that much easier, but that property manager or the host needs to be the one to push the button on the eviction in that case.

Toby: Atticus, you guys got to be doing like a rate for basic PadSplit and a PadSplit premium that includes the property management. You have to be doing something in your major system.

Atticus: Yeah, we do. In almost every market that we’re in, we can do both. We have the ability to do both. If you want to go just drink Mai Tais on the beach, Toby, and not deal with any of the management frustration, we can absolutely do both. We do that for about 50% of the portfolio where people say, all right, you just deal with this.

Even for people who are just getting started who may be sophisticated operators, we still recommend using the service for three months. There’s no long-term commitment. But use the service for three months and just learn the ropes. I still believe that small operators are the best because they’re the ones who really get to know all of the residents and all their idiosyncrasies. We can absolutely do that and help train folks as well.

Toby: What are the major markets that you guys are in right now?

Atticus: Atlanta Metro is a really big market for us. We’re throughout Florida. Virginia’s another big market, Texas. We just launched Las Vegas a couple months ago. We’re launching Phoenix now. We’re in New Orleans and South Louisiana. I really believe that the real estate investment community, those folks know their markets.

We get pulled into a lot of markets, pretty much all the ones that we’ve launched because there was a host in those communities who said, we need this product here. I see lots of the full-time workers in our community who cannot afford this insane cost of a one bedroom apartment rent. I think there’s a massive need for this here. We will absolutely work with any of those hosts and go anywhere in the US at this point.

Toby: That is so cool that you guys are doing it. I assume you’re on a nice growth model and that everything’s going great for you guys. If there was anything else, final words that you have for somebody out there, maybe they’re a landlord, maybe they’re thinking about getting into investing, what would you say to that person?

Atticus: For us, our mission is to solve the affordable housing shortage by leveraging housing as a vehicle for financial empowerment. That’s true for our residents and our members. It’s true for our hosts as well. It’s been really fulfilling to see just some incredible stories on both ends, where we provide tools, information, and incentives, and they do the rest. They own their journey.

I love seeing people take these opportunities, where we can be a tool to help them on whatever journey they happen to be on and to really do something with it that has lasting and sustainable impact in the world. We are the change we’re looking for. Just get out there and do something.

Toby: You’re to be commended for doing that because we are completely underbuilt. It’s going to get worse. With the interest rates going up, it’s going to make affordability even more difficult. If you’re one of those people that tried to find the one bedroom, one bath, it was $1300, $1400 just to get through the door. This sounds like it might be worthwhile, even as that person to go check out PadSplit and see if there are other alternatives for you. Maybe you live in a house with some roomies.

How does somebody find out more? I assume it’s just going to padsplit.com or something like that, but what would you say?

Atticus: You got it. We have pretty much all of the relevant information on our website, which is just padsplit.com. If you want to check out some of the individual stories from our residents or our hosts, those are on the stories page at the site as well. We’ve got tons of great tools and information on the site.

Toby: You guys keep doing the good work. We’ve been applauding you for years, your brother-in-law Frank and you. We’re going to keep applauding you guys for going out there and hitting this thing head on. It’s going to get worse, which means it’s going to get better for you guys.

I just want to say accolades to you for doing the right thing. You can profit while you’re doing good. I think that you guys are the prime example. The best of luck to you, and I hope you guys have massive success.

Atticus: Thanks so much, Toby. I really appreciate the opportunity. Always happy to be here.

Toby: Thanks, Atticus.