This article was originally featured in April 2018 Think Realty Magazine and written by Aaron Norris, VP of The Norris Group.
Co-living is all the rage in major metropolitan areas across the U.S. While these “hacker houses” or “adult dorms” are not new in concept, there are some major players raising some serious cash to construct new projects around this living concept to meet the growing need for affordable housing in major urban markets. Residential real estate investors should pay attention, as it might be a new housing model that maximizes rents, decreases turnover, and improves tenant quality.
Getting A Grasp On The Co-Living Concept
“Adult dorms” is the best slang term that efficiently describes the concept. The word “dorms” may trigger memories of cramped spaces, bunk beds, smelly bathrooms, and unkept kitchens. You’ll want to lean on the “adult” part of the slang term to firmly grasp the trend. While co-living comes in many shapes and sizes, at the core is a similar formula.
Imagine a 1,500-square-foot, three-bedroom, two-bathroom condo. The open-concept shared living space is something the current HGTV-generation can appreciate. It features a fully functional, commercial-grade kitchen and a beautifully decorated main living space. The bedrooms may be on the smaller side but feature space for a bed, desk, and TV. Tenants can choose to hibernate in their own living quarters or join their roomies for a cocktail as they wait for Uber Eats to drop off dinner.
Residential real estate investors should pay attention, as it might be a new housing model that maximizes rents, decreases turnover, and improves tenant quality.
Further, imagine this unit is one of 20 in a mid-rise in a major metro area. The building has amenities like a coffee shop, a co-working space, and a well-appointed workout facility. To make life easier, tenants write one check each month to cover rent, utilities, internet, cleaning services, and all the building amenities since everything is included.
Different developers have different approaches to creating the living spaces and layered amenities, but this is the core formula. These projects won’t just target mid-level, single tech professionals. Projects like The Villages in Florida have proven that the 10,000 active seniors retiring daily also want connections, amenities, and things to do. Having a roof over your head is so 20th century. Builders are not just building a property, they are creating a lifestyle, and there’s awesome potential here to cater to several markets and niches.
Before You Start Building Or Converting Current Properties
Real estate investors need to watch to see if co-living will be a passing fad like condo-hotels were right before the last housing bust or if certain specific demographics have evolved to prefer walkable lifestyles in amenity-packed buildings in an urban environment. Along the way, we can borrow some of the best parts of this concept for our own portfolios.
I personally know an investor in Riverside, California, who owns rentals and has been using a smaller version of this model for some time. She owns single-family rentals in Riverside which has a population around 350,000. So, it’s not an urban core. She furnishes the property in the main living spaces, stocks the kitchen appliances es, dishes, glasses, etc.), wraps in utilities (including internet), and provides monthly maid services and lawn care.
Her target demographics are young couples and professionals who work in the area. She’s able to charge a premium per room because of the furnished common areas and the service component. The property generates more income than if she rented the place in its entirety. An added benefit is one room going vacant does not completely stop cash flow. In addition, the maid service gives visibility into the condition and keeps the property looking better long-term. Surprisingly, she’s had little issue with tenants not getting along. Apparently, they hardly ever use the shared living space and keep to themselves in their respective rooms.
Things To Think About
Investors thinking about this strategy should look at local municipal codes. In my hometown, a property containing more than two unrelated parties must register with the city and pay for a license. Make sure you’re compliant to avoid fines or potentially getting shut down. All it takes is one upset neighbor to ruin everything!
Also, make certain someone on your team has enough “people” sense to act as a property manager and a hint of good ole’ matchmaker. Make certain you’re putting people together with enough in common and with enough background checks in place to manage risk. In today’s environment, I think we can all read into that statement and understand the extra layer of risk and responsibility involved in the co-living arrangement. Besides, happy tenants could be long-term tenants!
Aaron Norris is vice president of The Norris Group, which specializes in California hard money lending, trust deed investments, real estate investments, and real estate investor resources. Learn more at www.thenorrisgroup.com.