301: Backyard Rental Properties with Spencer Burleigh

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It's my pleasure to welcome Spencer Burley to the show. He is co founder and CEO of Rent the Backyard. Now we've all heard a lot about the sharing economy and this is a new spin in on it. Spencer, welcome. How are you?

I'm doing well. Thank you so much for having me on the show.

It's good to have you. And you're coming to us from San Francisco Bay Area, right?

Yeah, we're based down in Santa Cruz right now.

Okay, great. So how old is the company? When did you launch?

Yeah, so we incorporated back in November of 2018. So we've been in business a little while now, but we've been sort of setting everything up and are going through our first set of projects right now.

So I read an article about this and wanted to reach out to you and invite you onto the show. Where did the idea come from? Tell us about the problem and how you came about in the solution.

Yeah, so my co founder and I were always really big sort of financial nerds and as young people we were looking out to come to the Bay Area and it was just so expensive. But at the same time there's so much extra land that isn't really being used. So when we heard about these things the state calls accessory dwelling units or ADUs, we got really excited and thought we could apply like a financing model where we pay for everything upfront and in exchange we split some of the rent with the homeowners over a period of time.

So tell us more about the adu. I mean, there are lots of little kits and mini dwelling units. What makes the adu? I mean, what are some of the chief characteristics of it that make it unique?

The ones that we're building up are really upmarket. They go and they have sort of everything a homeowner or a tenant needs to live independent from the homeowner. So they have a small kitchenette, they have a bathroom including a shower, and then they even have a separate living area and bedroom. They allow a tenant to live entirely independently from a Homeowner and have a really great quality of life. We like to think of them kind of as like a distributed apartment.

So many houses have casitas or additional units in the back. What makes this different? Is it just a more modern version of it? Is it a prefab house? You know, tell us about the cost of it and so forth.

Yeah. So the innovation that our company really brings is on the financing side. So right now, if people want to build one of these units in their backyard, they need to typically borrow over $100,000 against their house and manage a construction process and then handle all the ongoing property management on top of all of that. So what we do is we make it really, really easy for people to get started with one of these units and to go and sort of just sign on the dotted line and we take care of the permitting, we take care of the building, and then we even take care of the ongoing property management. So for a lot of people, it's a really easy way to take this extra space that they're not really using and make some extra rental income for them from it.

So the homeowner with the space in the backyard is needs to pay for the unit though, right?

No. So we cover all the upfront costs, and the homeowner never pays any, like, a single cent unless they choose to, like, leave the agreement.

How many square feet are these units?

The ones we're building right now are about 300 square feet. As we expand, we might offer a slightly larger one, but the 300 square foot units are kind of in the sweet spot of they get a whole lot of rent and their construction costs are relatively lower compared to larger units.

So the backyard needs to have space of at least 20 by 25ft. They need to live in the front home most of the year. Why? Why is that? What if someone owns a rental property and they want to, instead of having one unit, they want to add an additional unit to the rental property?

Yeah, so this is a little bit dependent on jurisdiction. So there are some jurisdictions that require that the homeowner live in the property most of the year. So we kind of just say that as like an easy way to sort of be able to go and like, screen people at this point. But as we expand, we're definitely interested in working with a lot of people that have investment properties. And we already are starting a couple of projects with people that have investment properties in places like San Jose, where you aren't required to live in the home most of the year.

So those are really. That sounds like that's really more just the same rules that Airbnb and VRBO are fighting all the time with. I mean, almost everywhere they'll let you rent something out to, you know, on a short term rental website as long as you are there, as long as the owner is present. But as soon as the owner isn't present and they want to just strictly rent like the whole house to somebody, that's where they've sort of made the regulation to disallow that. Right?

Yeah. The lines seem to be drawn in different places in different municipalities, and there seems like there's a lot of innovative things coming on the regulatory side. So we're excited to work with people that have more investment properties than sort of primary residents they want to use this with. But mostly we're doing people with primary residences just because that's the way the laws look right now in 2019.

Yeah. So if someone approached you and said, I already have a back house, or I have a carriage unit over my garage in the back, or I have a casita or a mother in law's quarters, you know, would you do a deal with them?

Yeah, it's definitely something we would consider. I think the biggest value add that we have right now is that we finance the unit. So we might look to see like, oh, if you have a, like a home equity loan or something you're using to finance that, you might be able to sort of come to us and we could help you sort of roll that like monthly payment you have on the unit into our agreement where we just split the rent or something like that.

Now, in the world of zoning, the typical residential property is what's called R1 or residential one. And if it's a dup, it's called R2. And that means, you know, two units. You're able to do this in R1 zoned properties, right?

Yes. Most of the properties we see are R1. And then in California, they subdivide it into like R1 4, R1.8, and we're able to get all the way down to R1.8, which means there's like eight properties on an acre, typically. So we can build sort of quite small lots. The state has at this point passed a lot of laws that make them much, much easier to build, even in, in smaller lots.

Right, right. And so. So it looks like the municipalities are really trying to address the housing crisis to some degree with this kind of stuff, which is great. How much do those units cost? I mean, I know you're financing it, but just to understand kind of the economics of it. What do they cost you to buy or build? I don't even know the right word.

Those units, it really depends on where we're building right now. I guess the average would be somewhere between 100 and $200,000. But that depends on things like what do the city permits look like and like how level is the ground in the back and does work need to be done back there? So it's a little bit of a range. And then we kind of, as part of our process for taking a look at properties, are able to figure that out and give like a better idea of like what the rent split will look like for homeowners and what the term of the agreement will be. So it's fair for everyone.

I mean, that's actually surprisingly expensive. You're saying that's, you know, somewhere in the ballpark of $300, $330 to $660 per square foot.

Yes, they're quite expensive to build. It's typical with these buildings that a lot of the things you have are fixed costs. So like, once you get someone like in the backyard delay, like a slab foundation, being able to lay another 100 square feet is not the most costly. And we're definitely looking at ways to sort of work with different manufacturers and sort of be able to push the cost down as we scale. But the cost, as you point out, is one of the reasons that like we're starting out in California where real estate sells at about $1,000 a square foot, typically. So we're really focused here. But as the costs go down in the coming months and years, we'll be able to be in a lot more places, which we're really excited about.

And these are manufactured houses though, right? Most of it's built in a factory and assembled on site, is that correct?

Yeah. So they're largely prefabricated. So they either are flat packed, so they sort of come together like IKEA on site, or they're trucked in, like fully constructed and either rolled or lifted in. But there's all sorts of site work you need to do, like a slab foundation at this point, although we're looking at really cool things like pillared foundations, which would cut the costs and enable homeowners to get into these units for. For less all the time.

The cost of the unit versus the engineering and pouring the slab and all that kind of good stuff. Like, can you divide that up at all for us? It is amazing how much this stuff still costs. I'm just in shock. I'll Tell you why, just to give you Spencer, some of the background. Our listeners and clients keep sending me these things and you know, you see people sharing this stuff on Facebook. Well, you know this 3D printed home was built for only $10,000. And here you can buy a house on Amazon for $19,000 and have it shipped to you for no shipping cost. And I investigated this because I didn't believe sounded fantastic at first. My greed gene was kicking in. I'm thinking I'm just going to buy vacant lots all over the place and put these little units on them and rent them out and it's going to be great. And then I really started investigating this, come to find that all of those companies seem to have the same answer. When I say well, they'll say well you have to do this, that you have to have engineering. It doesn't include H Vac, it doesn't include plumbing, it doesn't include electrical, and there's engineering on the site just like you said with yours, etc. Etc. Well, I said well look, how much does it cost? And, and they all say the same thing. They say it's, it's pretty much pretty comparable to new home construction. And then I'm thinking what is the point? You can just have a builder build a house, right? And I said well what in your eyes does new home construction cost? And they, they'll say typically they'll answer about $200 per square foot. And I'm like, wow, it is amazing to me that we can't build a house for less than that nowadays. It seems like it should be dramatically less expensive if it's done in a factory. But I don't exactly know what the hang up is. To me, the construction industry, it's just a very primitive industry. And I'm all in favor of modular housing built in a factory, assembled on a job site. That's the way it should be. Yet there's this crazy stigma that Americans have against that they think of a mobile home like some cheap mobile home. Well actually there are some very nice mobile homes out there and some very nice manufactured houses. But you know, the banks view it differently when it comes to financing. It's just kind of crazy. We need to get over this. There's a housing crisis in the country and we got to make more cost effective housing and people have got to get over this discriminatory belief against manufactured housing. But still it needs to get less expensive. At the same time, what's the problem.

Here in our business is really like we're sort of the entire company is a function of rent versus construction costs. So this is something we think about all the time. And we're talking to all sorts of really exciting manufacturers that do that, like 3D printing and do like low impact foundations where they build units that sit on stilts and all sorts of other things like that. And those are able to push the cost down. Hopefully that'll get below $100,000 for. But a lot of the cost that's built in comes at the city level. So especially in California, to build a new home, the amount of times you need to go and ask the community for its input and be able to do impact studies and things like that dramatically increases the price. So with these accessory units, there is a new cutout in the California law that makes it so you don't need to do a lot of those steps, which chops off a lot of the overhead there. But yeah, you're totally right. The construction still is very, very expensive. And we're really committed to pushing that down to make this viable for more. More homeowners and more renters and to help fix the housing issues we have in this country.

Even what you said there, though, getting it like your goal is to get it down to $100,000. That's still $333 per square foot.

Yes, it is still incredibly expensive. I just see this future of everybody living in tiny 300 square foot.

It is remarkable what this stuff costs. And then I suppose if and when you expand to areas that are affected by things like hurricanes, tornadoes. California have earthquakes, of course, but then your cost might go up even more. It depends, right?

Yeah. I think the building codes definitely play a role in the construction costs because things do need to get built to a certain standard. Right now, all the units we built are built to the same building code that a typical house is. And we tell people that the units we build will last longer than their main home. And that's true because the building codes have become so much more robust and have so many more requirements than they used to have, which I think also influences the cost of instruction.

Oh, but no question about it. Yeah, absolutely. Okay, let's talk about the income side for a moment before we wrap up. You say that like, right. On your website it says you can earn $6,000 per year as a homeowner by renting out a unit in your backyard. Tell us how you calculate that and what these units rent for and the economics. I think you mentioned that you split the income with the owner of the property. Tell us more about that.

Yeah. So the idea that we've moved to is, is where one where we guarantee homeowners the first $500 of each month's rent. And then on top of that, we'll handle all of the maintenance and repairs and pay any increase in property tax that might come from installing a unit. And what this does is it gives homeowners a much more stable source of income and they're really able to be able to tell, especially when they're an older person who's on something like Social Security and wants to know exactly what their check is going to be, we can give them that stable income. So that's the model we're doing right now. We've thought about doing more explicit like profit sharing where we split rent, like 50, 50 or something like that. But at this point we've heard from homeowners and so many of them that we're just offering the first $500 of each month's rent as a guarantee to homeowners to give them that stability.

How many of these units do you have installed so far?

Yeah, we're going through the process of building our first batch of 10 or 20. So we're kind of chugging along and we're installing units at a really quick rate.

Are you backed? Do you have funding from a VC or angel investor?

Yeah, we have, we have enough funding to accomplish our goals from venture capitalists. And then the goal as we we get larger is to sort of issue debt or find more sort of third party investors that are interested in like the cash flows of our business. But we're jump starting it with venture and using that to run the first batch of these units.

Okay, so how much do you project? I mean, is anybody living in one of these yet? Is anything built or is it all under construction?

So far, the units that we're specifically like under rent, the backyard's name building, are under construction, but we work with a building partner that's built over 180 of these in the Bay Area. So they're very experienced and they have a lot of units out in the wild.

Okay, and how much do those rent for? That's what I'm getting at. Like, what's the renter paying? And I know the homeowner is. You're working on the deal where they guaranteed 500 per month, which is great. What does the renter pay though?

Yeah, so right now we're looking between 1,500 and $2,000 in the Bay Area. So it's a little bit of a range. This Depends on like if you're close to a tech campus, like Google or Microsoft or someone like that, or if you're close to like a rail station or a sports arena or a college, and then also just sort of generally what city you're in. So we're trying to sort of optimize the places we build at first to, to maximize that, that top line rental income. But it's a, it's a pretty wide range, at least in the Bay Area.

Okay, very interesting. One of the things on your website that's addressed is parking. And that's a big issue for a lot of, a lot of municipalities. You know, if you have a three bedroom house, you've got to have at least a two car garage. You know, that'll be what they say. And if you, you want to build that extra bedroom, you know, you got to have another parking space. Now you're saying, though, that's almost never required, which surprises me.

Yeah, so this is something that's specific to California and as we, as we grow, that might be a requirement that changes and something we need to build. But California's specific law on these accessory dwelling units is that you don't need to build parking if you're within a quarter mile of a public transit stop, including a bus stop. So almost all homes that we look at in the Bay Area fit that requirement. Don't require parking to be built.

Right, right. They'll at least have a bus stop for sure. Yeah. Okay, good stuff. Is there anything else you want to share with our audience?

I don't think so. At this point, we're really focused on the San Francisco Bay Area right now in 2019, but we're sort of excited to expand. And the next markets we'll probably be looking at are Los Angeles, Portland, Seattle, Denver, Austin and beyond. So we'll be to where you are soon enough.

Yeah, yeah, Good stuff, good stuff. And I got to say, from the looks of you and your partner, you guys look really, really young. So congratulations on getting a head start on life with what you're doing. Do you care to share anything about that? You know, it's up to you, but you guys are really starting out early, it looks like.

Yeah. I think that one of the reasons we started this, this company was because as, as younger folks, we were looking to, to move out to the Bay Area and it was just so expensive. And at the same time, we'd been really big, like economics nerds. My co founder and I are engineers out of Carnegie Mellon and we had really sort of became really fast friends by talking about different and interesting financial products. So we're really excited about the work we're doing and we're super big housing nerds and hope we can make some impact in the world to make it a little bit better for existing homeowners who can go and take some underutilized space and make some extra income from it, as well as on the renter side and helping more people find high quality, affordable places to live.

Excellent. Good stuff. Well, hey, I wish you a lot of success with this. It's certainly needed the website again is Go ahead, give out your website.

It's just rentthebackyard.com Excellent.

Thank you for joining us.

Thank you so much for having me.

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