2347: Co-Living Secrets: Unlocking 37% Annual ROI and 14% Cash-on-Cash Returns

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You'Ve got.

The best podcast going. Jason, I love your show, man. It's good stuff.

Thank you. I really appreciate it.

What I wanted to share was I, my wife and I, for the first time ever, paid effectively no income tax in 2022 through doing a cost segregation study and generating about a $200,000 paper loss on our real estate. I'm a real estate professional and it really works.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your financial Independence Day. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

Hey, we've got a great master class today, everybody. Really looking forward to diving into this. I think it is one of the best opportunities in the real estate world right now with phenomenal rent to value ratios. So that's going to be exciting. Very exciting. It's great to have everybody on this fine day. There is an opportunity that I've been looking at for just slightly over five years now and I have not been interested in it until recently. I kind of wanted to see the people behind it work the bugs out. I wanted to see if it would last. I'm a pretty conservative person. The older I get, the more conservative I get, it seems like I guess that's just natural, kind of comes with age for probably all of us. You know, I wanted to wait to see that this would work. I am now convinced that that it does work, is working, has been working, that the folks behind it have worked a lot of the bugs out. So we're going to talk about that today and let me share my screen and share a couple of things with you. So I'm just going to take you back in time and I want you to look at this pro forma. You know, one of the things I've said for 21 years teaching real estate investors about investing is that you want to standardize your data. You must standardize your data. And this is a property that we were talking about back in 2009. This was 16 years ago. And this was just a typical property. Okay, this was Indianapolis market. Here you can see that this property was a whopping $83,000. It was $24 per square foot.

I'm sure all of you are saying, oh my God, that's ridiculous. Right? Here's the perform a blown up, by the way, Eric, take a look at this. This is what I'm talking about, about blowing up the Performas, you know, just like this. So here is the top of the Performa. You could see this is only $24 per square foot for this property. $25,000, give or take. We'll buy it for you. With a projected rent of $1200, basically right. Offering at the time an overall return on investment projected at 40% annually, cash on cash, 20% cap rate 11.2. This was a very realistic thing back 16 years ago. But there's something you had to have 16 years ago that most people didn't have and that is courage.

And what do I mean by that? Well, you know, there was a lot of negativity. I mean, we were just kind of in the thick of the Great Recession at the time. People were very scared, scared to invest. But we had many investors who did invest back then and they've made absolute fortunes. And right now we're in this phase where the market is just, I'd call it kind of boring. You know, there really is no real estate crash, but certainly we've seen a muted market, a market where, you know, prices haven't been going up very much. Nationally they are up like 2% year over year. Nothing exciting there. And in some markets they're down. I'd say some of the worst markets are Austin, Texas and Cape Coral, Florida. Those markets have been pretty hard hit. They're down like, you know, depending on what survey you look at about 14% at the worst. Okay, so that's kind of where we are now. But the difference we have now that we didn't have during the Great Recession is we did not have a housing shortage back then like we do now. And there was an overbuilding. And for that, you know, that decade following the Great Recession, there was a massive under building, especially an underbuilding of entry level homes that was really, really underbuilt. Builders were building some higher end stuff. They couldn't make the numbers work. They didn't have a lot of money because people didn't Want to fund builders a whole lot back then because they were scared. They saw what happened during the Great Recession and it was hard to raise capital. Right. This is a very different time this time around. And as the builders didn't build for over a decade, they just were very shy and building very little inventory. The population was increasing, household numbers were increasing. That's why we have such a housing shortage today. And there's one solution that is a really, really good solution to solve the housing shortage and that is co living. We're going to talk about two markets today, but this is just Phoenix as an example because we did a Phoenix property tour and we toured a co Living property and talked about that the weekend before last. So a week and a half ago here in Phoenix. I'm currently in Phoenix right now myself. Okay. And I lived here for seven years and decided to move back. It really was my favorite place to live. So this is just a survey of what we've got going on in the largest capital city in America with about 5 million in population. About half of those are considered workforce people. Okay. And they need about 2 million housing units. Right. Overall, Phoenix has a housing gap of about 59,000 units almost. And there's very little new construction because most of the valley has been built out. It's largely an infill market. And there are some outlying areas that we toured that won't be considered outlying areas in the future, by the way. You know, that's the way the path of progress works. You know, what's considered outlying becomes the main area of the future. Right. But you just have to wait a few years for that all to happen. There's a tremendous demand for workforce housing. You know, the current Stock is almost 2 million and that results in a deficit about 59,000 units. But they would need an extra 41% in income just to afford the median priced rental. Not to afford a home, not to buy a home, not to have a lavish rental, just to afford the median price rental. Okay. So there's a huge gap. I mean, it's really no secret to anybody anymore that there's a giant shortage of entry level workforce housing. We're in a time where we've got an epidemic of what's known as the working poor in the U.S. certainly you've all seen and heard and read about surveys that show you like how many hours a week a minimum wage worker would have to work to afford a one bedroom rental. It's an insane number. They have to work two, two and a half, three jobs to do it the only real solution to this that makes any sense is co Living. Okay? And that's why this is really, really interesting. Now. I was very skeptical of this when I first started really researching it deeply about five years ago. But I'm not skeptical anymore because there are really only a few solutions for these people, right? Build more housing for them, relocate to farther outside the city. And then when you see gas prices go up, that's really impacts them and do more with existing housing. And that's the solution that co Living offers. The other interesting thing is, is the decline of marriage rates. We all know this has been going on for a few decades now. Marriage is just not a thing anymore. I wouldn't want to be in the wedding planning business or anything like that because there's a lot less demand for it. So household size, and this is a Census Bureau survey. You can see United States Census down here. Household size is getting much smaller. There are fewer people per house. If you go back into the Post World War II baby boom era, there were a lot more people per house. And then as they started to have kids, there were even more people per household, right? And now we've seen that decline. You can look at this many different ways. This is married households, huge decline there, non family households. And that's on the rise. You know, the rise of roommates, the rise of co living. And this is just the numbers of people living alone. Okay? There's just a lot of solo households nowadays, right. Where you just didn't have that before. One thing I always say on the podcast and on the YouTube channel is it's really important for us to all realize how much the world has changed in just the matter of several decades, which isn't much time. You know, that's a pretty short time. And I always say you must watch old movies, watch old TV shows, listen to old music and read old books. And by old, I don't mean really old. One of the things I've gotten a little bit, I guess, obsessed with binge watching is an old TV show called Alfred Hitchcock Presents. I think Alfred Hitchcock was a really interesting director, way ahead of his time. You know, these were all made like from 1955 to 1965. And you know, in watching these episodes, you just see how different people were, how differently they lived, how basically nobody was single, right? Everybody got married young. You know, there were four people per household and now there's like one person per household. So what all this says is it just creates more demand for more housing units and smaller housing units. It's a big market that needs to be addressed. And you see this steady decline in household size and okay, and this is just, you know, a 14 year survey, 2010-2024. Here's the household formation numbers, here's the total household numbers and here's the people per household, okay? Declining, declining, declining, steady decline. Never really any real increase in terms of prices. I talked, you know how the market's just kind of muted and it's just kind of boring, right? And here we go, you know, this is where we are and we're seeing, you know, moderate appreciation nationally, but nothing too exciting. There's your median price numbers 2.2% year over year. So nothing too exciting. If you talk to almost any expert, they'll agree that the average over time for real estate price increases about 6% now. Some years it's a lot better. In the COVID era we saw Prices jump almost 50%. Five zero. Right. It's just crazy. The other thing is be a direct investor. Do not invest in someone else's deal. Most of us are familiar now this is a well known real estate guru, Marco Santarelli, who now has been charged with running a huge ponji scheme and bilking investors out of $62.5 million. You know, we want to be direct investors, so what choice do we have? Well, direct investors, they can buy cryptocurrency, they can buy gold, right? That's direct investment. Or you can be a non direct investor and leave yourself susceptible to violating commandment number three, which is this problem, right, where you have some fund manager or someone who is either ripping you off blindly or they are mismanaging because of their incompetence. Or number three problem, assuming they're honest and competent, and I mean from the C suite, the Wall street investment banks, small syndicators that are syndicating apartment buildings, small fund managers and things like that. And if they're honest and competent, the third problem is they take a giant management fee off the top for managing the deal. So this is an extraordinary return in 10 years to see the S&P go up 195%. That's pretty amazing, right? That's, that's definitely unusual. So that's great. And gold has been on a tear lately. I mean gold, you know, a really boring asset class has been doing really well. Median home price is also up very good. But this chart would have you believe falsely that gold and the S P outperform real estate. And that is simply not true. Because real estate is leveraged. Most of the time. So with just very conservative leverage, putting 20% down and financing 80% and having the tenant pay the debt for you on the 80% and maybe give you some extra called positive cash flow, your real estate outperforms everything. It's up 465% without including positive cash flow, tax benefits, equity pay down, where the tenant is paying down your loans for you without including my trademarked inflation induced debt destruction strategy. It's a multi dimensional asset class. This is just one dimension, leverage, okay, because the leverage amplifies your return. So this 93% that happened over this 10 year period, this equates to a 4, 165% return in 10 years. That is incredible. And it's a really safe asset class. It's been proven for literally thousands of years. You know, it's not new. I mean, you know, people might say the bitcoin bugs might say, oh well, bitcoin is like incredible, right? But a lot of times it's down, okay? And it's just, it's only got, you know, a very short track record, just over 15 years. Whereas income property has been around since ancient Rome, really. Okay? So it's got a very, very long track record. And when you equate it properly, it just beats everything else by a long shot. Again with only one dimension that I'm mentioning here. Okay, now back to co living. This is an example, living in Phoenix, of what someone would save. I always say to my team, I always say to them this statement, and if you have a business, I encourage you to also use this concept, which is always have the customer experience. You know, when you build a website, a landing page, whatever, use it just like a customer would use it. Don't use it like an insider would use it. You know, log out of your admin account and do what a customer would do and understand the way they experience it. And this is the same with a tenant, right? How do your tenants experience something? So think about the way they experience it, right? The way they experience life. What are their options, what are their choices? And why would they choose your thing versus something else? Well, on a co living thing, you know, where a typical Phoenix, you know, little studio rental might be $1276 a month, got a water bill of 30 bucks, Internet of 60 bucks. And that's without all the, you know, channels and the super duper high speed and all that stuff. An electric bill of 110 on average in the summer, much higher of course, gas bill of 50 bucks and trash and recycling $20. So they're going to save about $918 per month. It's a pretty incredible opportunity for them to save a lot of money and get their life together and get things happening for them. Okay, Eric, are you ready for us? Where are you? So I'll give you a little background on Eric. First of all, we have known and worked with Eric for many, many years. Probably starting in about 2009, about 16 years ago maybe. He's based in Atlanta and many, many, many of my clients over the years have purchased properties that he acquired, rehabbed and flipped them to our investors for long term buy and hold. He made them turnkey. He has been doing co living for quite a while. We have just been really conservative and skeptical and not interested in doing co living until recently. And so we've kind of waited to see this work that bugs out. Do you want to talk about the early days of co living, Eric? And you know what, what did you think way back in the day? What were other people saying and thinking and, and how was it going versus how it is today? You know, that's. This is about an eight year span, I think, right?

Yeah, I think the first one I ever did was in 17. I can tell you that I was apprehensive on my end startup just because, you know, all the zoning aspects of it. I didn't know how you could have more than three tenants in a home and have it still pass guidelines. And so there's just a number of factors that I wasn't comfortable working with any investors unless they were very, very experienced in real estate in general and then accredited in a big way. And so if someone who knew what they were doing, then I was happy to broker deals. But otherwise I was frankly a little uncomfortable. Until as it evolved I noticed they were able to work through frankly a lot of the political climate, making sure that the zoning aspects was not going to be an issue. And so they worked hard, lobbying and working with a lot of folks to be worked. But yeah, the early days and that's.

What I was concerned about. It was kind of like, think of it, maybe as a comparison would be Uber back in the old days, you know, Uber fought tons of legal battles and just went through massive growing pains to get through the hurdles of displacing the taxicab industry. Right. You know, there was a giant lobby against them. They had to overcome a lot of stuff. That's what I was worried about with co living. But this now is here to stay and it seems like a very solid asset class. Let's define what Co Living is. Okay, this is where you take a typical single family home in an expensive single family home, in Eric's case, about $350,000. We'll look at some pro forma like that today in the Phoenix market. More expensive, about $550,000 give or take. But you convert it to a home with eight to 10 bedrooms and each bedroom is. Has its own electronic lock on it, similar to a hotel. And people live together and share this home and they can do that very inexpensively. They pay rent weekly. They pay about you know, 200, maybe up as high as $250 per week. And this really serves a huge segment of the population that just can't afford traditional housing. So it's a really interesting opportunity and has proven itself by now. And we all know how bad shortages go ahead.

Eric, I think you highlighted it perfectly. But I would just say as even over the last five years with the COVID inflation boom, the, the need for this type of housing has gone up dramatically. Certainly the Atlanta area, probably nationwide, but. But here especially because rents have almost doubled in that time. Typical. Yes. Obviously we address briefly the co living but taking one home, an area that I think otherwise folks with six to 800amonth wouldn't be able to afford and being able to rent it out by the room. And typically the time frame for the Atlanta market is a minimum of three months and the average stay is approximately nine months which we'll get into. But the average room rate is around 160. Or sharing a bathroom if you have your own ensuite, it's about 250. When it says average of six bedrooms, it's actually I would say more like eight. We do go from about six 12 bedroom. That's rare. So six to 10 bedrooms is the range. And the majority I would say are. Are between 6 and 8.

And in Phoenix and I believe Brian and Gina are on here, I know Jerem is and we'll talk to Jerem in a moment. But those are typically eight bedroom, three bathroom configurations. So they do vary around the country. And you know, with, with the house of course, really easy move in, really easy application and no security deposit. So this is way better than living in your car or on the street.

And you do need to be employed as well. That's important. Note, they don't want folks that are not employed.

One of the questions we always get is the dynamic of these strangers living together and co living. And there are a few things that really address this problem. Number one, reviews. Okay, so the tenants review each Other or they're called members, not tenants, but they review each other. The property owner, operator reviews the member and the member can review the property as well. Okay. So it goes all ways. It's like a 360 degree review, which is very, very powerful. And the dynamic of most of these members that live in the co living facilities is that they are working a lot and many of them are working two, even sometimes three jobs and they're coming home to sleep, maybe grab a meal, and they're out and off to work again. Okay, so these people are working a lot.

Yep. So as metro Atlanta lost a ton of affordable hiding around230,000 combination of prices going up dramatically, and then we had a huge institutional buyer flux, which I think was in large and mostly good, fixed up a lot of areas that were struggling, would have never been revitalized. But at the same time, affordability really went down dramatically with that and inflation so lost a ton of that opportunity. Rent rates in the last five years to seven years in Atlanta doubled. And so therefore the amount that, you know, working class folks are spending on rent is much frankly. And so that affordability component is very difficult. Then the.

Eric, let me make. I'm not sure if you made the point on the institutional investors. So Atlanta is a huge market for institutional investors. We've seen tons of influx from Invitation Homes, American Homes for Rent, all of these giant investors that own 80, 90,000 single family homes and are renting them because they've realized this is the most historically proven asset class in the entire world. And so they love it. But that's had the effect of raising rents and really lowering the supply of affordable housing in Atlanta, in Phoenix, in many other markets as well.

Yep. And so we continue to have this before it needs to be addressed. And so new, new construction is also very expensive to build. So for here, it's very difficult to build a house of lower income folks.

You know, 80% average occupancy versus 48% on Airbnb. Now I do want to say something. This is not a comparison to Airbnb, except in one little way. What happened in the Airbnb market is interesting. You know, tons of investors flocked into short term rentals and they all wanted to be hospitality managers. Right. And for a while, you know, I'd say Airbnb really gained a lot of traction around 2012. And there was a run there for probably a good seven or eight years where the short term rental market was very lucrative for investors. We dabbled in it a little bit but never really got into it in any major way. And I think co living will probably get that way in five to seven years as well. Because the opportunity is so good, the cash flow is so good, the numbers are so good and the built in demand is so high that I could see this market getting oversaturated eventually. But we're in the very early stages of it. So I think the opportunity is pretty great right now. And we've probably got a very long Runway for it.

Well, just one thing on that. With supply, like there's only a certain amount of houses you can fit seven, eight bedrooms that are not in a traditional neighborhood environment near, you know, bus stops and other stuff like that. So the supply in Atlanta could be, I think will be in because there's only so much. Because it doesn't make sense to have a three bedroom.

Yep.

Yeah.

And yeah, so. So a traditional like suburban house doesn't work very well. You can't really do this in HOA areas. So there is, there's definitely limited supply. When we talk about the Phoenix market, we'll address that as well. And so in Your market, about 150 to 210 per week and that's weekly rent. So when you do the math, remember, multiply the weeks times 52, divide by 12. There's not four weeks in a month, there's four and a third weeks in a month. So when you're thinking of this rent, that's how you multiply it, four and a third. Okay. Some of them have like an ensuite bathroom, some don't. There's almost never a couple. It's almost always single people. There's almost never a kid, but occasionally. Right, Eric, you'll allow that, right?

It's rare occasion, but yeah, it does happen. Yes.

The owner of course is operating the property and just keep paying for all utilities, wifi, et cetera. And so that's just simple. That's part of your expense profile and it's in the pro forma. Okay. We want to get these properties close to mass transit. Only 40% of CO living residents or members own a car. Okay. So a lot of them are taking mass transit. You know, there's definitely a profile of the type of property that we look for. And you know, here are the. Some of the other things. Okay. I just want to get to a performer here that's really. Oh, here's. This is new since yesterday. Okay, so here's an example property. Tell us about this one.

Yes, this is actually a sample property that here in Atlanta typically Going to be a split level or large ranch with a basement.

Because eight bedrooms. And I have a couple of interior pictures, so I just wanted to give folks a sample. So you're looking at either a combination of LVP or hardwoods in a lot.

Of these luxury vinyl planks in some.

Instances, like commercial grade carpet. Yep, yep. Luxury vinyl plank. Just less wear and tear on these types of products. But this is a very good example what an interior would look like on.

We'll get. We'll get to that performance. Second, Derek has a question. Derek, your hand is raised. Can you tell us what city are you in and just unmute. What's your question?

Yeah, Derek Harsey from Dallas. So, quick question. You know, I have a couple of kids in college, and what you're describing is almost exactly the experience for these colleges. Kids that are living with a bunch of other kids and they have a locked door and so on. Is. Is part of the target market, like college towns.

No.

These are not frat houses. They're like working adults. But that's a, that's a very good question because a lot of the college housing is the same concept and even weekly rentals sometimes. But these are. These are not geared toward college kids. Right, Eric?

Correct. Yeah, there's almost none of them. Yeah.

What would you say the typical age is?

I would say just work between 40 and 60, I think would be the vast majority of them, if I were to guess.

Good. Good question, Derek. Thanks. Okay, so here's a Performa. Is this, by the way, the property we just saw the pictures of?

No, that was just one that had a good bright light. So that's. This is not the same property, but.

Okay, so this Performa is a different property, but it's an example. Okay. And you know, there are several. And your investment counselor can help you navigate this along with Eric or other providers. So this one's 2500 square feet. It's 379,000. Takes about 110,000 to buy it. The projected rent is 6900 per month. You've got some vacancy built in here, and here's your expenses. Okay. So remember, and by the way, we've updated these Performas because we own this software for co living where we added utilities and supplies under other. Okay. And that's about $1,000 a month. Okay. Here you've got your net operating income, your cash flow of almost $1,300 per month. Remember, that's with vacancy in here, a vacancy rate of 12%, our normal vacancy rate that we Project on single family homes is 8% and the management fee. Look at this, folks. 16%. Okay, so this is a conservative performer. If you do this through Pad Split, which is kind of like the Airbnb of the Co Living world. So you have a traditional property manager you're paying 8% to and then the Pad split fee. If you use Pad Split as the platform, which you don't have to have another 8%. So that's 16%. So all of the stuff is really in here. Okay. When we look at your return. So let's go back and look at overall return on investment. What are those projections, like Your cap rate? 9.9%. Try and beat that. Okay, that's phenomenal. Cash on cash return of 14% annually. So that means even if the property goes down in value, like if you're a doomer and you're scared that real estate crash hasn't happened yet, it's still going to happen. Even with rates going down, as long as you maintain the same expense and income ratio, you're going to get 14% annually and an overall return on investment of 37% annually. Our traditional single family homes can't come close to this. This is one of the many reasons we're very excited about Co Living.

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